Transcript AP Micro 2-8 Consumer Choice

Consumer Choice and
Utility Maximization
1
The Law of Diminishing “ADDITIONAL”
“SATISFACTION”
2
3
The demand curve shows marginal benefit.
The supply curve shows marginal cost.
For the 10th unit,
consumers are willing
to give up $5. They
value that 10th unit at
$5.
Demand P
Schedule $5
P Qd
Supply
Schedule
S=MC
P Qs
4
$5 10
$5 50
3
$4 20
$3 30
$2 50
$1 80
$4 40
2
This 20th unit
cost $2 to
make.
Producers
will produce
to the 20th
unit at $2.
1
o
10
20
30
40
$3 30
D=MB $2 20
50
60
70
80
Q
$1 10
4
Thinking at the Margin
# Times
Watching Movie
1st
2nd
3rd
Total
Marginal
Utility
$30
$15
$5
$50
Price
$10
$10
$10
$30
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
0
1
2
3
Total Utility
(in utils)
0
8
14
19
4
5
6
7
8
23
25
26
26
24
Marginal
Utility/Benefit
How many pizzas would you buy if the price
per slice was $2?
6
Calculate Marginal Utility
# of Slices of
Pizza
0
1
2
3
Total Utility
(in dollars)
0
8
14
19
4
5
6
7
8
23
25
26
26
24
Marginal
Marginal Cost
Utility/Benefit
0
8
6
5
$2
$2
$2
$2
4
2
1
0
-2
$2
$2
$2
$2
$2
How many pizzas would you buy if the price
per slice was $2?
7
Calculate Marginal Utility
# of Slices of
Pizza
0
1
2
3
4
5
6
7
8
Total Utility
(in dollars)
0
8
14
19
Marginal
Marginal Cost
Utility/Benefit
0
8
6
5
2
2
2
2
0
-2
2
2
2
2
2
You will continue to
consume until
23
4
Marginal
Benefit
=
25
2
Marginal
Cost
26
1
26
24
How many pizzas would you buy if the price
per slice was $2?
8
$10
Utility Maximization
# Times
Going
Marginal
Utility
(Movies)
1st
2nd
3rd
4th
30
20
10
5
MU/P
(Price =$10)
Marginal
Utility
(Go Carts)
$5
MU/P
(Price =$5)
10
5
2
1
If you only have $25, what combination of
movies and go carts maximizes your utility?
$10
Utility Maximization
# Times
Going
Marginal
Utility
(Movies)
1st
2nd
3rd
4th
30
20
10
5
$5
(Price =$10)
Marginal
Utility
(Go Carts)
(Price =$5)
3
$2
$1
$.50
10
5
2
1
$2
$1
$.40
$.20
MU/P
MU/P
If you only have $25, what combination of
movies and go carts maximizes your utility?
$10
Utility Maximization
# Times
Going
Marginal
Utility
(Movies)
1st
2nd
3rd
4th
30
20
10
5
$5
(Price =$10)
Marginal
Utility
(Go Carts)
(Price =$5)
3
$2
$1
$.50
10
5
2
1
2
$1
$.40
$.20
MU/P
MU/P
If you only have $25, what combination of
movies and go carts maximizes your utility?
$10
Utility Maximization
# Times
Going
Marginal
Utility
(Movies)
1st
2nd
3rd
4th
30
20
10
5
$5
(Price =$10)
Marginal
Utility
(Go Carts)
(Price =$5)
3
2
1
.50
10
5
2
1
2
1
.40
.20
MU/P
MU/P
If you only have $25, what combination of
movies and go carts maximizes your utility?
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
Px
Py
Assume apples cost $1 each and oranges cost $2 each. If the
consumer has $7, identify the combination that maximizes utility. 13
Utility Maximizing Rule
The utility maximizing rule assumes that you always
consume where MU/P for each product is equal
14