Chapter 5 Constrained optimization and consumption

Utility maximization

A constrained optimization problem seeking to maximize utility given a budget constraint while holding income constant.

Expenditure minimization

A constrained optimization problem seeking to minimize expenditure while holding utility constant.

Lagrangian equation

A mathematical method that is used to solved constrained optimization problems by combining the objective function and the constraint function into a single function.

Constrained optimization

A mathematical problem that seeks to find the maximum/minimum of a function given a constraint represented by another mathematical function.

Lagrangian multiplier

Denoted with λ, the Lagrangian multiplier is referred to as the shadow value of money. It represents the amount of utility obtained when spending another dollar.