1. CONSUMER BEHAVIOR

2. UTILITY The satisfaction that consumption of a good or service provides

3. DIMINISHING MARGINAL UTILITY As you consume additional units of a good, at some point each additional unit will begin providing less utility than the one before it.

4. UTILITY Total utility Total satisfaction from a specific quantity Marginal utility Extra satisfaction from an additional unit Law of diminishing marginal utility Explains downward sloping demand How are newspaper vending machines different than pop machines? Why? 7-4

5. GRAPHING UTILITY 0 10 20 30 10 8 6 4 2 0 -2 1234567 1234567 Total Utility (Utils) Marginal Utility (Utils) (1) Tacos Consumed Per Meal (2) Total Utility, Utils (3) Marginal Utility, Utils 0123456701234567 0 10 18 24 28 30 28 ] ] ] ] ] ] ] 10 8 6 4 2 0 -2 TU MU Total Utility Marginal Utility Units Consumed Per Meal 7-5 Let’s go to… How many tacos will you eat? What KEY piece of information are we missing?

6. THEORY OF CONSUMER BEHAVIOR Key dimensions of the consumer problem Rational behavior Preferences Budget constraint Prices 7-6

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 Copyright ACDC Leadership 2015

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 Util/$ Calculating Marginal Utility Per Dollar allows you to compare products with different prices. 8 Copyright ACDC Leadership 2015

9. THEORY OF CONSUMER BEHAVIOR Find utility maximizing combination of goods Utility maximizing rule Allocate income Last dollar spent on each good yields same marginal utility Marginal utility per dollar What provides more utility to you, a Baconator or a JBC? Why might you still buy the JBC over the Baconator? 7-9

10. 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

11. Utility Maximization # Times Going Marginal Utility (Movies) MU/$ (Price =$10) Marginal Utility (Go Carts) MU/$ (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

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

13. 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) 1st303102 2nd20251 3rd1012.40 4th5.501.20 $10$5 3 Movies and 2 Go Carts Copyright ACDC Leadership 2015

14. 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) 1st303102 2nd20251 3rd1012.40 4th5.501.20 $10$5 Copyright ACDC Leadership 2015

15. 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 15 P x P y You use this rule subconsciously every day! Copyright ACDC Leadership 2015

16. 2008 Audit Exam

17. Pg. 165 #4 17 What information do we need to figure out how much of each maximizes utility?

18. Pg. 165 #4 18

19. Numerical Example Combinations of apples and oranges obtainable with an income of $10 1. Compare marginal utilities 2. Then compare per dollar - MU/Price 3. Choose the highest 4. Check budget - proceed to next item 7-19

20. LET’S SPEND THE $10!

21. WHAT ABOUT AN $8 BUDGET??

22. $9???

23. ALGEBRAIC GENERALIZATION MU of product A price of A MU of product B price of B = 8 Utils $1 16 Utils $2 = Optimum Achieved – Money income is allocated so that the last dollar spent on each product yields the same extra or marginal utility 7-23

26. HOMEWORK FOR MONDAY Read pgs 196-209 and complete: pg. 218 review questions #1, 4 and pg. 219 problem #1