Consumer Choice &
Utility Maximization
1
The Law of “LESS & LESS”
“ADDITIONAL” “SATISFACTION”
You haven’t had anything to
eat for the past 3 days, and
burrito is your FAVORITE
food, what would you feel
when you finally eat…
2
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 /
Marginal Benefit
Marginal
Cost
0
0
0
$2
1
2
3
4
5
6
You8 will continue
8
to14consume6 until
19
5
Marginal
Utility
=
23
4
25
2Cost
Marginal
$2
$2
$2
$2
$2
26
1
$2
7
26
0
$2
8
24
-2
$2
How many pizzas would you buy if the
price per slice was $2?
4
You plan to take a vacation and want to
maximize your utility. Based on the info
below, which should you choose?
Destination
Tahiti
Chicago
Marginal Utility
3000
5000
Price
3000
2500
Marginal Utility
Per Dollar
1Util
2Utils
Calculating Marginal Utility Per Dollar allows
you to compare products with different prices.
5
Utility Maximization
$10
If you only have $25, what
combination of movies and go
carts maximizes your utility?
#
Times
Going
Ttotal
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
Utility Maximization
$12
If you have $30, what
combination of bowling
and pizza maximizes your
utility?
$2
#
Times
Going
Marginal
Utility
(Bowling)
MU/P
($12)
Marginal
Utility
(Pizza)
MU/P
($2)
1st
2nd
3rd
4th
48
36
12
6
4
10
8
4
2
5
3
1
.50
4
2
1
Utility Maximization
If you have $150, what
combination of yearbook
& video game maximizes
$45 your utility?
$50
Quantity
of
purchasing
Total
Utility
(Yearbook)
Total
Utility
(Video Game)
1
2
3
4
360
585
675
720
450
650
750
775
Utility Maximization
If you have $150, what
combination of yearbook
& video game maximizes
$45 your utility?
$50
Quantity
purchased
Total
Utility
(YB)
Marginal
Utility
(YB)
Total
Utility
(Game)
Marginal
Utility
(Game)
1
2
3
4
360
585
675
720
360
225
450
650
750
775
450
200
90
45
100
25
Utility Maximization
If you have $150, what
combination of yearbook
& video game maximizes
$45 your utility?
Quantity
purchased
1
2
3
4
TU
(YB)
MU
(YB)
360 360
585 225
675 90
720 45
$50
MU
MU
TU
MU
Per (Game) (Game) Per
Dollar
Dollar
8
5
2
1
450
650
750
775
450
200
100
25
9
4
2
.50
2012 Micro (Marginal Utilities)
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? 24
Quantity
Marginal
Quantity
of Bagels Utility from of Toy
Bagels
Cars
1
2
3
4
5
6
8
7
6
5
4
3
1
2
3
4
5
6
Marginal
Utility from
Toy Cars
10
8
6
4
3
2
(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 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. 3 bagels & 5 toy cars
(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. Demand for bagels will not change because the increase
the price of wheat will only affect the supply of bagels.
in
(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? Bagels are inferior goods.
(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. % Δ Q
- 4%
%ΔP
=
10%
= - 0.4