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I understand that solutions on boundary of the set under consideration when doing constrained optimization are often problematical. Usually it is said that we assume that goods are essential to insure an interior solution.

But are there not a set of conditions that can be imposed on the utility function for example - rather that stipulating it as a primitive - to insure that the solution is interior?

I realize that this offcourse depends on the particular program under consideration. So to be concrete I am primarily interested in the standard program where

$$\max_x \ u(x) \\ s.t. \ \ px \leq w$$

where $p>>0$ and $w>0$.

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In order to have $x^*_j>0$, it is possible to impose either
(i) a condition on the marginal utility: $\lim_{x_j\rightarrow0} \partial{U}/\partial{x_j}(x)=+\infty$
(ii) or an inequality $x_j \geq a_j>0$ where $a_j$ is interpreted as a subsistence level of $x_j$
Often the utility function is reparameterized and written $U(x-a)$ with the constraint $X:=x-a\geq 0$, which ensures that $x^*\geq a$ at the inner optimum.

Example: in the Cobb-Douglas case with subsistence levels, we have $$ U(X_1,X_2)=U(x_1-a_1,x_2-a_2)=(x_1-a_1)^\alpha(x_2-a_2)^\beta $$

Provided that the income $m$ is high enough, the Marshallian demands are given by:

$$x^*_1 = a_1 + \frac{\alpha}{\alpha+\beta}\frac{m-p_1a_1-p_2a_2}{p_1}\\ x^*_2 = a_2 + \frac{\beta}{\alpha+\beta}\frac{m-p_1a_1-p_2a_2}{p_2}. $$

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    $\begingroup$ Not sure I can see how the second strategy gives an interior solution, by which I mean one where MRS equals relative prices. $\endgroup$ – user270396 Jan 11 at 13:21
  • $\begingroup$ I have added an example for illustration. $\endgroup$ – Bertrand Jan 11 at 17:21
  • $\begingroup$ Thank you for the example. However, if I understand it correctly there is only interior solution if income is large enough otherwise I guess there is a border solution. To repeat I am not looking for a way to ensure that consumption is positive or above some minimum threshold but instead to ensure that there is an interior solution in the sense that MRS = relative prices (which is not the case for border solutions). I am only interested in $x_1>0$ and $x_2>0$ because that implies MRS=relative prices. $\endgroup$ – user270396 Jan 14 at 12:04
  • $\begingroup$ OK in this case only (i) is a suitable answer not (ii). $\endgroup$ – Bertrand Jan 14 at 13:14

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