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

Objectives: 1.Explain what marginal utility is and how it is applied to food. 2.Explain why diminishing marginal utility occurs after marginal benefit=marginal utility. 3.To receive the greatest total utility from a given income, a consumer should allocate that income between 2 products in a way that the marginal utility per dollar is the same for each product. This is called consumer equilibrium b/c the consumer has no incentive to change the allocation of income unless the price of a product changes. Explain why the consumer will be better off staying at equilibrium. 2

Consumer Choice and Utility Maximization 3 Copyright ACDC Leadership 2015

Calculate Marginal Utility # of Slices of Pizza Total Utility (in utils) Marginal Utility/Benefit How many pizzas would you buy if the price per slice was $2? 4 Copyright ACDC Leadership 2015

Calculate Marginal Utility # of Slices of Pizza Total Utility (in dollars) Marginal Utility/Benefit How many pizzas would you buy if the price per slice was $2? Marginal Cost $2 5 Copyright ACDC Leadership 2015

Calculate Marginal Utility # of Slices of Pizza Total Utility (in dollars) Marginal Utility/Benefit How many pizzas would you buy if the price per slice was $2? Marginal Cost Copyright ACDC Leadership 2015

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 Copyright ACDC Leadership 2015

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 Copyright ACDC Leadership 2015

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 If you only have $40, what combination of movies and go carts maximizes your utility? Copyright ACDC Leadership 2015

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 If you only have $40, what combination of movies and go carts maximizes your utility? Copyright ACDC Leadership 2015

Utility Maximization # Times Going Marginal Utility (Movies) MU/P (Price =$10) Marginal Utility (Go Carts) MU/P (Price =$5) 1st nd20$25$1 3rd10$12$.40 4th5$.501$.20 $10$5 If you only have $40, what combination of movies and go carts maximizes your utility? Copyright ACDC Leadership 2015

If you only have $40, 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) 1st nd rd th $10$5 3 Movies and 2 Go Carts Copyright ACDC Leadership 2015

1. How much is the total utility from 3 movies and 2 go carts? 2. Total utility from 2 movies and 4 go carts? Utility Maximization # Times Going Marginal Utility (Movies) MU/P (Price =$10) Marginal Utility (Go Carts) MU/P (Price =$5) 1st nd rd th $10$5 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 14 P x P y You use this rule subconsciously every day! Copyright ACDC Leadership 2015