At the new optimal point F, utility is maximized because the individual's personal trade-off (the Marginal Rate of Substitution, MRS) is equal to the market's trade-off (the Marginal Rate of Transformation, MRT). Following the wage increase, this MRT is higher, as it is determined by the new, higher wage. The selection of point F demonstrates the new equilibrium where the MRS adjusts to equal this higher MRT, bringing the two trade-offs back into balance.

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Following a wage increase, Karim's new utility-maximizing choice is found at point F. This bundle consists of 17 and a third hours of free time and €300 of consumption. Graphically, this point represents the tangency between the new, steeper budget constraint and a higher, downward-sloping, convex indifference curve. This choice signifies the optimal combination of free time and consumption at the new wage, allowing Karim to achieve a greater level of utility.

Karim's New Optimal Choice at a Higher Wage: Point F (17 1/3 Free Time, €300 Consumption)

To cite the ebook, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/.

To cite a unit, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/ Unit [unit number] (url).

CORE Econ - The Economy 2.0: Microeconomics

A higher wage expands an individual's feasible set, enabling them to achieve a higher level of utility. This improvement in living standards is demonstrated when the new, steeper budget constraint allows for a new optimal choice on a higher indifference curve. For instance, Karim's ability to move to point F after his wage increase signifies a clear gain in his overall satisfaction or welfare.

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