Consumer Choice & Utility Maximization 1

The Law of Diminishing “ADDITIONAL” “SATISFACTION” 2 You haven’t had anything to eat for the past 3 days, and burritos are your FAVORITE food, what would you feel when you finally eat…

The Law of Diminishing “ADDITIONAL” “SATISFACTION” 3

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

# of Slices of Pizza Total Utility Marginal Utility/Benefit Mrginal Cost 000$ $2 3195$2 4234$2 5252$2 6261$2 7260$ $2 How many pizzas would you buy if the price per slice was $2? 5 Calculate Marginal Utility You will continue to consume until Marginal Benefit = Marginal Cost

You plan to take a vacation and want to maximize your utility. Based on the info below, which should you choose? DestinationMarginal Utility Price Tahiti3000$3,000 Chicago1000$500 6 Marginal Utility Per Dollar 1 Util 2 Utils Calculating Marginal Utility Per Dollar allows you to compare products with different prices.

If you only have $25, what combination of movies and go carts maximizes your utility? Utility Maximization # Times Going Marginal Utility (Movies) MU/P ($10) Marginal Utility (Go Carts) MU/P ($5) 1st3010 2nd205 3rd102 4th $10$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 the price of a toy car is $1. What quantity of Quantity of Bagels Marginal Utility From Bagels (utils) Quantity of Toy Cars Marginal Utility from Toy Cars (utils) AP Micro FRQ – Marginal Utilities 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.