Economics application of constrained maximization.

How consumers allocate their budget among multiple potential expenditures is a central question of microeconomic theory. Consider a basic model of a single consumer, n goods, and his or her optimal consumption bundle given input information of prices and preferences. Assume that he or she maximizes a Cobb-Douglas utility function U : U (a, b, c, . . . , n) = a b c . . . n (1)

where a, b, c, . . . , n are quantities of the goods and , , , . . . , are the respective preference weights on the goods, where + + + . . . + = 1. Assume that the consumer faces a total budget constraint of d, such that: aA + bB + cC + . . . + nN = d (2)

where A, B, C, . . . , N are the prices of the goods described above. Note that all prices and preferences are positive and constants, that all quantities are positive but not necessarily integers, and a through n means n goods, not 14. Solve for a, b, c, . . . , n

Solution. This problem can be solved using the Lagrangian multiplier method, considering a 3-good model and then expanding to n goods. max f (a, b, c) = a b c g(a, b, c) = aA + bB + cC d = 0 f = (A1 b c , a b1 c , a b c1 ) g = (A, B, C) f = g = b1 a = a= a= a= d ,b = A a1 b c A a1 b B A bB cC = A A d A + + + ... + d d d ,c = ,...,n = B C N (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)