Question

Which types of preferences will always result in an interior optimum for utility maximization (assuming income is greater than $0)

Answer 1

Multiple choice options

Perfect complements

Cobb Douglas

Perfect substitute

Concave IC

Quasi linear

Answer:

Perfect complements

Cobb Douglas

Explanation:

Perfect complements and Cobb Douglas will always result in interior optimum for utility maximization

When we talk of perfect competition, the consumer would always consume both goods and would do so in fixed proportions.

For cobb Douglas, the consumer spends a fixed part of income on the good. The part of income that is spent is dependent on the exponential power of goods it was spent on.

For perfect substitute and concave IC, any of one good is consumed

For quasi linear, first one good is consumed till some unit. After this unit is done with, if anything is left on income, the remaining income will be spent on other good. So at income level, there is corner solution and whereafter there will be interior solution.