Consumer Choice and Utility Maximization

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Consumer Choice and Utility Maximization

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Presentation transcript:

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

Would you see the movie three times? Thinking at the Margin # Times Watching Movie Marginal Utility Price 1st $30 $10 2nd $15 3rd $5 Total $50 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 3rd time.

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

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

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

Marginal Utility Per Dollar 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 Tahiti 3000 $3,000 St. Augustine 1000 $500 Marginal Utility Per Dollar 1 Util 2 Utils

Marginal Utility Per Dollar 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 Tahiti 3000 $3,000 St. Augustine 1000 $500 Marginal Utility Per Dollar 1 Util 2 Utils Calculating Marginal Utility Per Dollar allows you to compare products with different prices.

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

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

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

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

Utility Maximizing Rule Let’s see add a column for marginal utility. 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. 3 apples and 2 oranges Assume apples cost $1 each and oranges cost $2 each. If the consumer has $7, identify the combination that maximizes utility.

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

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 minute or two calculate this out. Apples Oranges Total Marginal Quantity Utility MU/P 1 20 30 2 35 15 50 3 45 10 65 4 5 75 52 80 20 15 15 10 10 7.5 5 5 2 2.5 3 apples and 2 oranges Apples cost $1 each and oranges cost $2 each. If the consumer has $7, identify the combination that maximizes utility.

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