Transcript Marginal Utility

Consumer Choice &
Utility Maximization
1
The Law of Diminishing
“ADDITIONAL” “SATISFACTION”
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…
2
The Law of Diminishing
“ADDITIONAL”
“SATISFACTION”
3
Thinking at the Margin
# of Times
Watching
Movie
Marginal
Utility
Price
$
1st
$30
$10
2nd
$15
$10
3rd
$5
Total
$50
<
$10
$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 3rd time.
Calculate Marginal Utility
# of Slices
of Pizza
Total
Utility
Marginal
Utility/Benefit
Mrginal
Cost
0
0
0
$2
1
2
3
4
5
6
8
You 8will continue
14
6
to consume
until
19
5
23
4
Marginal
Benefit
=
25
2
Marginal
Cost
26
1
$2
$2
$2
$2
$2
$2
7
26
0
$2
8
24
-2
$2
How many pizzas would you buy if the
price per slice was $2?
5
You plan to take a vacation and want to
maximize your utility. Based on the info
below, which should you choose?
Destination
Marginal
Utility
Price
Marginal Utility
Per Dollar
Tahiti
3000
$3,000
1 Util
Chicago
1000
$500
2 Utils
Calculating Marginal Utility Per Dollar allows
you to compare products with different prices.
6
Utility Maximization
$10
If you only have $25, what
combination of movies and go
carts maximizes your utility?
#
Times
Going
Marginal
Utility
(Movies)
MU/P
($10)
Marginal
Utility
(Go Carts)
MU/P
($5)
1st
2nd
3rd
4th
30
20
10
5
3
10
5
2
1
2
2
1
.50
$5
1
.40
.20
2012 AP Micro FRQ – Marginal Utilities
Quantity
of Bagels
Marginal
Utility From
Bagels (utils)
Quantity
of Toy
Cars
Marginal Utility
from Toy Cars
(utils)
Theresa consumes both bagels and toy
cars.
(a) The table above shows Theresa’s
1
8
1
10
marginal utility from bagels and toy
2
7
2
8
cars.
3
6
3
6
(i) What is her total utility from
4
5
4
4
purchasing three toy cars?
(ii) Theresa’s weekly income is $11,
5
4
5
3
the price of a bagel is $2, and the
6
3
6
2
price of a toy car is $1. What
quantity
bagels and
of 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 crossprice elasticity for toy cars and blocks and indicate if it is positive or negative.