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Consumer Choice and Utility Maximization 1. The Law of Diminishing ADDITIONAL SATISFACTION 2.

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Presentation on theme: "Consumer Choice and Utility Maximization 1. The Law of Diminishing ADDITIONAL SATISFACTION 2."— Presentation transcript:

1 Consumer Choice and Utility Maximization 1

2 The Law of Diminishing ADDITIONAL SATISFACTION 2

3 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. Thinking at the Margin # Times Watching Movie Marginal Utility Price 1st$30$10 2nd$15$10 3rd$5$10 Total$50$30

4 Calculate Marginal Utility # of Slices of Pizza Total Utility (in utils) Marginal Utility/Benefit 00 18 214 319 423 525 626 7 824 How many pizzas would you buy if the price per slice was $2? 4

5 Calculate Marginal Utility # of Slices of Pizza Total Utility (in dollars) Marginal Utility/Benefit 000 188 2146 3195 4234 5252 6261 7 0 824-2 How many pizzas would you buy if the price per slice was $2? Marginal Cost $2 5

6 Calculate Marginal Utility # of Slices of Pizza Total Utility (in dollars) Marginal Utility/Benefit 000 188 2146 3195 4234 5252 6261 7 0 824-2 How many pizzas would you buy if the price per slice was $2? Marginal Cost 2 2 2 2 2 2 2 2 2 You will continue to consume until Marginal Benefit = Marginal Cost 6

7 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 Tahiti3000$3,000 Chicago1000$500 Marginal Utility Per Dollar 1 Util 2 Utils 7

8 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 Tahiti3000$3,000 Chicago1000$500 Marginal Utility Per Dollar 1 Util 2 Utils Calculating Marginal Utility Per Dollar allows you to compare products with different prices. 8

9 If you only have $25, what combination of movies and go carts maximizes your utility? Utility Maximization # Times Going Marginal Utility (Movies) MU/P (Price =$10) Marginal Utility (Go Carts) MU/P (Price =$5) 1st3010 2nd205 3rd102 4th51 $10$5

10 If you only have $25, what combination of movies and go carts maximizes your utility? Utility Maximization # Times Going Marginal Utility (Movies) MU/P (Price =$10) Marginal Utility (Go Carts) MU/P (Price =$5) 1st30310$2 2nd20$25$1 3rd10$12$.40 4th5$.501$.20 $10$5

11 If you only have $25, what combination of movies and go carts maximizes your utility? Utility Maximization # Times Going Marginal Utility (Movies) MU/P (Price =$10) Marginal Utility (Go Carts) MU/P (Price =$5) 1st303102 2nd20$25$1 3rd10$12$.40 4th5$.501$.20 $10$5

12 If you only have $25, what combination of movies and go carts maximizes your utility? Utility Maximization # Times Going Marginal Utility (Movies) MU/P (Price =$10) Marginal Utility (Go Carts) MU/P (Price =$5) 1st303102 2nd20251 3rd1012.40 4th5.501.20 $10$5

13 Utility Maximizing Rule The consumers money should be spent so that the marginal utility per dollar of each goods equal each other. MUx = MUy 13 P x P y Assume 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 14


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