Unit 2 Demand Supply and Consumer Choice Copyright

Unit 2: Demand, Supply, and Consumer Choice Copyright ACDC Leadership 2015 1

Consumer Choice and Utility Maximization Copyright ACDC Leadership 2015 2

Calculate Marginal Utility # of Slices of Pizza 0 1 2 3 Total Utility (in utils) 0 8 14 19 4 5 6 7 8 23 25 26 26 24 Marginal Utility/Benefit How many pizzas would you buy if the price per slice was $2? Copyright ACDC Leadership 2015 3

Calculate Marginal Utility # of Slices of Pizza 0 1 Total Utility (in dollars) 0 8 2 3 4 5 6 7 8 Marginal Cost Utility/Benefit 0 8 $2 $2 14 19 6 5 $2 $2 23 25 26 26 24 4 2 1 0 -2 $2 $2 $2 How many pizzas would you buy if the price per slice was $2? Copyright ACDC Leadership 2015 4

Calculate Marginal Utility # of Slices of Pizza 0 1 2 3 4 5 6 7 8 Total Utility (in dollars) 0 8 Marginal Cost Utility/Benefit 0 8 You will continue to 14 6 consume until 19 5 23 4 Marginal Benefit = 25 2 Marginal Cost 26 1 26 24 0 -2 2 2 2 2 How many pizzas would you buy if the price per slice was $2? Copyright ACDC Leadership 2015 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 Chicago 1000 $500 2 Utils Copyright ACDC Leadership 2015 6

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 Chicago 1000 $500 2 Utils Calculating Marginal Utility Per Dollar allows you to compare products with different prices. Copyright ACDC Leadership 2015 7

$10 Utility Maximization # 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) $5 MU/P (Price =$5) 10 5 2 1 If you only have $40, what combination of movies and go carts maximizes your utility? Copyright ACDC Leadership 2015

$10 Utility Maximization # Times Going Marginal Utility (Movies) 1 st 2 nd 3 rd 4 th 30 20 10 5 $5 (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 $40, what combination of movies and go carts maximizes your utility? Copyright ACDC Leadership 2015

$10 Utility Maximization # Times Going Marginal Utility (Movies) 1 st 2 nd 3 rd 4 th 30 20 10 5 $5 (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 $40, what combination of movies and go carts maximizes your utility? Copyright ACDC Leadership 2015

$10 Utility Maximization # Times Going Marginal Utility (Movies) 1 st 2 nd 3 rd 4 th 30 20 10 5 $5 (Price =$10) Marginal Utility (Go Carts) (Price =$5) 3 2 1. 50 10 5 2 1. 40. 20 MU/P If you only have $40, what combination of movies and go carts maximizes your utility? 3 Movies and 2 Go Carts Copyright ACDC Leadership 2015

$10 Utility Maximization # Times Going Marginal Utility (Movies) 1 st 2 nd 3 rd 4 th 30 20 10 5 $5 (Price =$10) Marginal Utility (Go Carts) (Price =$5) 3 2 1. 50 10 5 2 1. 40. 20 MU/P 1. How much is the total utility from 3 movies and 2 go carts? 2. Total utility from 2 movies and 4 go carts? Copyright ACDC Leadership 2015

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 You use this rule subconsciously every day! Copyright ACDC Leadership 2015 13

2008 Audit Exam

Utility Maximizing Rule The utility maximizing rule assumes that you always consume where MU/P for each product is equal Copyright ACDC Leadership 2015 17