Consumer Choice and Utility Maximization The Law of

Thinking at the Margin # Times Watching Movie 1 st 2 nd 3 rd

Calculate Marginal Utility # of Slices of Pizza 0 1 Total Utility (in utils)

Calculate Marginal Utility # of Slices of Pizza 0 1 2 3 4 5

CONSUMER BEHAVIOR You plan to take a vacation and want to maximize your utility.

$10 Utility Maximization s $5 Go K arts ie v o M # Times

$10 $5 Utility Maximization Go ies v o M # Times Going Marginal Utility

$10 $5 Utility Maximization Go vies Mo # Times Going Marginal Utility (Movies) 1

$10 s e i ov Utility Maximization M # Times Going Marginal Utility (Movies)

Utility Maximizing Rule The consumer’s money should be spent so that the marginal utility

Utility Maximizing Rule The utility maximizing rule assumes that you always consume where MU/P

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Consumer Choice and Utility Maximization The Law of Diminishing “ADDITIONAL” “SATISFACTION” 1

Thinking at the Margin # Times Watching Movie 1 st 2 nd 3 rd Total Marginal Utility $30 $15 $5 $50 Price $10 $10 $30 Would you see the movie three times? Notice that the total benefit is more than the total cost but you would NOT watch the movie the 3 rd time.

Calculate Marginal Utility # of Slices of Pizza 0 1 Total Utility (in utils) 0 8 2 3 4 5 6 7 8 14 19 23 25 26 26 24 Marginal Utility/Benefit How many pizzas would you buy if the price per slice was $2? 3

Calculate Marginal Utility # of Slices of Pizza 0 1 2 3 4 5 6 7 8 Total Utility (in dollars) 0 8 14 19 23 25 26 26 24 Marginal Cost Utility/Benefit 0 8 6 5 4 2 1 0 -2 $2 $2 $2 How many pizzas would you buy if the price per slice was $2? 4

Calculate Marginal Utility # of Slices of Pizza 0 1 2 3 4 5 6 7 8 Total Utility (in dollars) 0 8 14 19 23 25 26 26 24 Marginal Cost Utility/Benefit 0 8 6 5 4 2 1 0 -2 You will continue to consume until Marginal Benefit = Marginal Cost 2 2 2 2 2 How many pizzas would you buy if the price per slice was $2? 5

CONSUMER BEHAVIOR You plan to take a vacation and want to maximize your utility. Based on the info below, which should you choose? Destination Marginal Utility (In Utils) Price Marginal Utility Per Dollar Tahiti 3000 $3, 000 1 Util St. Augustine 1000 $500 2 Utils 6

$10 Utility Maximization s $5 Go K arts ie v o M # Times Going Marginal Utility (Movies) 1 st 2 nd 3 rd 4 th 30 20 10 5 MU/P (Price =$10) Marginal Utility (Go Carts) MU/P (Price =$5) 10 5 2 1 If you only have $25, what combination of movies and go carts maximizes your utility?

$10 $5 Utility Maximization Go ies v o M # Times Going Marginal Utility (Movies) 1 st 2 nd 3 rd 4 th 30 20 10 5 Kar ts (Price =$10) Marginal Utility (Go Carts) (Price =$5) 3 $2 $1 $. 50 10 5 2 1 $2 $1 $. 40 $. 20 MU/P If you only have $25, what combination of movies and go carts maximizes your utility?

$10 $5 Utility Maximization Go vies Mo # Times Going Marginal Utility (Movies) 1 st 2 nd 3 rd 4 th 30 20 10 5 Ka rts (Price =$10) Marginal Utility (Go Carts) (Price =$5) 3 $2 $1 $. 50 10 5 2 1 2 $1 $. 40 $. 20 MU/P If you only have $25, what combination of movies and go carts maximizes your utility?

$10 s e i ov Utility Maximization M # Times Going Marginal Utility (Movies) 1 st 2 nd 3 rd 4 th 30 20 10 5 $5 Go Ka rts (Price =$10) Marginal Utility (Go Carts) (Price =$5) 3 2 1. 50 10 5 2 1. 40. 20 MU/P If you only have $25, what combination of movies and go carts maximizes your utility?

Utility Maximizing Rule The consumer’s money should be spent so that the marginal utility per dollar of each goods equal each other. MUx = MUy Px Py Let’s see add a column for marginal utility. Assume apples cost $1 each and oranges cost $2 each. If the consumer has $7, identify the combination that maximizes utility. 12

Utility Maximizing Rule The consumer’s money should be spent so that the marginal utility per dollar of each goods equal each other. Take a MUx = Muy Px Py Apples Quantity 0 1 2 3 4 5 Total Utility 0 20 35 45 50 52 Oranges Marginal Utility 0 20 15 10 5 2 Quantity 0 1 2 3 4 5 Total Utility 0 30 50 65 75 80 Marginal Utility 0 30 20 15 10 5 minute or two calculate this out. Now, MU/P… Assume apples cost $1 each and oranges cost $2 each. If the consumer has $7, identify the combination that maximizes utility. 13

Utility Maximizing Rule The consumer’s money should be spent so that the marginal utility per dollar of each goods equal each other. Apples Quantity 0 1 2 3 4 5 Total Utility 0 20 35 45 50 52 Oranges Marginal Utility 0 20 15 10 5 2 MU/P 20 15 10 5 2 Quantity 0 1 2 3 4 5 Total Utility 0 30 50 65 75 80 Marginal Utility MU/P 0 30 15 20 10 7. 5 15 5 10 2. 5 5 Take a minute or two calculate this out. Apples cost $1 each and oranges cost $2 each. If the consumer has $7, identify the combination that maximizes utility. 14

Utility Maximizing Rule The utility maximizing rule assumes that you always consume where MU/P for each product is equal 15