Outline the decision rule for how to make the most of a fixed budget?

Question

also decision rule for deciding how much of a product to produce,

what is the common principle underlying these rules.

what examples can be used to illustrate the answer?

how can you produce a given output level at a minimum cost?

Answer 1

Basically it comes down to utility. You need to maximise your total utility, subject to the particular constraints imposed by the individual situation.

For example, if you're starving and you find some money on the street, how would you best spend it on food? Your utility might be measured in terms of calories, to keep it simple. In which case you want to maximise the number of calories you get by spending the money you have. By considering different types of food items within your budget, you'd choose the combination that had the most calories.

In different situations, utility is measured in different ways. If you're buying a car, for example, it's quite difficult to determine which model is "best", for you, as there are lots of different factors to consider, some of which (e.g. looks) are hard to pin down. How do you compare a red Fiat with a white Ford?