What is boundary solution?
In economics, a boundary solution refers to a situation in which an optimization problem has a solution where the optimal value lies at the edge or boundary of the feasible set of options.
To understand this concept, consider a simple example. Suppose a consumer wants to maximize their utility by choosing between two goods, X and Y, subject to a budget constraint. The budget constraint represents the set of feasible options that the consumer can choose from, given their income and the prices of the goods. If the consumer's budget is such that they can only afford to consume either X or Y, but not both, then the optimal solution lies at the boundary of the feasible set.
Boundary solutions can also arise in other economic models, such as in the production and investment decisions of firms. In these cases, the boundary of the feasible set may represent technological or resource constraints that limit the choices available to the firm.
Boundary solutions can have important implications for economic analysis and policy. For example, a policy that aims to increase consumer choice by expanding the feasible set of options may not be effective if the optimal solution already lies at the boundary of the original feasible set.