How Do the Concepts of Consumer
Choice and Utility Maximization
Explain Consumer Behavior?
Do Now: How do you choose the
“best” way to spend your money?
I. The Law of Diminishing
“ADDITIONAL” “SATISFACTION”
2
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
Total Utility
(in utils)
0
1
2
3
4
5
6
7
8
0
8
14
19
23
25
26
26
24
Marginal
Utility/Benefit
How many pizzas would you buy if the price
per slice was $2?
4
Calculate Marginal Utility
# of Slices of
Pizza
Total Utility
(in dollars)
0
1
2
3
4
5
6
7
8
0
8
14
19
23
25
26
26
24
Marginal
Marginal Cost
Utility/Benefit
0
8
6
5
4
2
1
0
-2
$2
$2
$2
$2
$2
$2
$2
$2
$2
How many pizzas would you buy if the price
per slice was $2?
5
Calculate Marginal Utility
# of Slices of
Pizza
Total Utility
(in dollars)
0
1
2
3
4
5
6
7
8
0
8
14
19
23
25
26
26
24
Marginal
Marginal Cost
Utility/Benefit
0
8
6
5
4
2
1
0
-2
You will continue to
consume until
Marginal Benefit =
Marginal Cost
2
2
2
2
2
2
2
2
2
How many pizzas would you buy if the price
per slice was $2?
6
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
Marginal Utility
Per Dollar
Tahiti
3000
$3,000
1 Util
Chicago
1000
$500
2 Utils
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II. 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
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.
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$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?
III. 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.
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Utility Maximizing Rule
The utility maximizing rule assumes that you always
consume where MU/P for each product is equal
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