Consumer Choice & Utility Maximization

The Law of “LESS & LESS” “ADDITIONAL” “SATISFACTION” You haven’t had anything to eat for the past 3 days, and burrito is your FAVORITE food, what would you feel when you finally eat…

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

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

You plan to take a vacation and want to maximize your utility You plan to take a vacation and want to maximize your utility. Based on the info below, which should you choose? Destination Tahiti Chicago Marginal Utility 3000 5000 Price 3000 2500 Marginal Utility Per Dollar 1Util 2Utils Calculating Marginal Utility Per Dollar allows you to compare products with different prices.

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

Utility Maximization If you have $30, what combination of bowling and pizza maximizes your utility? $2 $12 # Times Going Marginal Utility (Bowling) MU/P ($12) Marginal Utility (Pizza) ($2) 1st 48 10 2nd 36 8 3rd 12 4 4th 6 2 4 5 3 4 1 2 .50 1

Quantity of purchasing Utility Maximization $50 If you have $150, what combination of yearbook & video game maximizes your utility? $45 Quantity of purchasing Total Utility (Yearbook) (Video Game) 1 360 450 2 585 650 3 675 750 4 720 775

Utility Maximization $50 If you have $150, what combination of yearbook & video game maximizes your utility? $45 Quantity purchased Total Utility (YB) Marginal Utility (Game) 1 360 450 2 585 650 3 675 750 4 720 775 360 450 225 200 90 100 45 25

Utility Maximization $50 If you have $150, what combination of yearbook & video game maximizes your utility? $45 Quantity purchased TU (YB) MU Per Dollar (Game) 1 360 450 2 585 225 650 200 3 675 90 750 100 4 720 45 775 25 8 9 5 4 2 2 1 .50

2012 Micro (Marginal Utilities) Quantity of Bagels Marginal Utility from Bagels Quantity of Toy Cars Marginal Utility from Toy Cars 1 8 10 2 7 3 6 4 5 Theresa consumes both bagels and toy cars. (a) The table above shows Theresa’s marginal utility from bagels and toy cars. (i) What is her total utility from purchasing three toy cars? (ii) Theresa’s weekly income is $11, the price of a bagel is $2, and 24 the price of a toy car is $1. What quantity of bagels and toy cars will maximize Theresa’s utility if she spends her entire weekly income on bagels and toy cars? Explain your answer using marginal analysis. (b) Assume that the price of wheat, an input for the production of bagels, increases. Will Theresa’s demand for bagels increase, decrease, or not change? Explain. (c) Suppose that Theresa’s income elasticity for bagels is –0.2. Does the value of Theresa’s income elasticity indicate that bagels are normal goods, inferior goods, substitutes, or complements? (d) Suppose that when the price of toy cars increases by 10 percent, Theresa buys 5 percent fewer toy cars and 4 percent less of a different toy, blocks. Calculate the cross-price elasticity for toy cars and blocks and indicate if it is positive or negative. 3 bagels & 5 toy cars Demand for bagels will not change because the increase in the price of wheat will only affect the supply of bagels. Bagels are inferior goods. % Δ Q % Δ P = - 4% 10% = - 0.4