The Application of Lagrange Multipliers in Consumer Choice Theory

Abstract

This article deals with the consumer choice theory developed by Irving Fisher, Francis Edgeworth, Vilfredo Pareto, and John Hicks. A three-dimensional utility function is presented as an alternative to indifference curves. In mainstream textbooks, the indifference curves together with the budget constraint are used to find the optimum of a consumer graphically at a point where the budget line is a tangent line to an indifference curve. In this article, a vertical cross-section of the three-dimensional utility function and the Lagrange multipliers are applied to find the optimum of a consumer directly from the three-dimensional utility function subject to the budget constraint.

Keywords

• consumer choice
• consumer optimum
• indifference curves
• three-dimensional utility finction