AGENDA Tues 9/29
• QOD #17: Deb’s decisions
• HW Review Ch 6 Q & P
• Diminishing Marginal Utility
• Tutorial/Office hours update (Tues pm, Thurs am)
• Syllabus Addendum: Exams
• Video links (DMU1; MU Brownies)
• HW: Read pp 140-147 Q #1,2b
QOD #17: Deb’s Decisons
Suppose that with a budget of $100, Deborah spends $60
on sushi and $40 on bagels when sushi costs $2 per piece
and bagels cost $2 per bagel. But then, after the price of
bagels falls to $1 per bagel, she spends $50 on sushi and
$50 on bagels.
O How many pieces of sushi and how many bagels did
Deborah consume before the price change?
O At the new prices, how much money would it have cost
Deborah to buy those same quantities (the ones that she
consumed before the price change)?
O Given that it used to take Deborah’s entire $100 to buy
those quantities, how big is the income effect caused by
the reduction in the price of bagels?
Deb’s Solution
O Before the price change, Deborah consumed
30 pieces of sushi and 20 bagels.
O At the new prices, it would have cost Deborah
$80 to buy those same quantities. The income
effect is $20.
Total Utility and Marginal Utility
0
1
2
3
4
5
6
7
LO1
(2)
(3)
Total Marginal
Utility, Utility,
Utils
Utils
0
]
10
]
18
]
24
]
28
]
30
]
30
]
28
10
8
4
2
0
-2
30
TU
20
10
0
6
Marginal Utility (Utils)
(1)
Tacos
Consumed
Per Meal
Total Utility (Utils)
Total Utility
1
2
3
4
5
6
7
1
2
3
4
5
6
7 MU
10
8
6
4
2
0
-2
6-4
Theory of Consumer Behavior
ORational behavior
OPreferences
OBudget constraint
OPrices
LO2
6-5
Utility Maximizing Rule
OConsumer allocates his or her
income so that the last dollar spent
on each product yields the same
amount of extra (marginal) utility
OAlgebraically
MU of product A
Price of A
=
MU of product B
Price of B
OWorked Problem
LO2
6-6
Mylie’s Demise (P#6.1)
Song performance
Total Utlity
Marginal Utility
1
50
50
2
90
40
3
70
-20
4
20
-50
5
-50
-70
6
-200
-150
Johnny’s Coke Problem (P# 6.2)
Total Utility
Marginal Utility
1
10
10
2
25
15
3
50
25
Omar’s Coffee House (P# 6.3)
Coffee
Marginal
Utility
Donuts
Marginal
Utilty
1
1.5
1
10
2
1.5
2
9
3
1.5
3
8
4
1.5
4
7
5
1.5
5
6
6
1.5
6
5
7
1.5
7
4
8
1.5
8
3
9
1.5
9
2
10
1.5
10
1
Ricardo’s Round-up (P# 6.4)
UNITS
OF A
MU
UNITS
OF B
MU
UNITS
OF C
MU
UNITS
OF D
MU
# of $
Saved
MU
1
72
1
24
1
15
1
36
1
5
2
54
2
15
2
12
2
30
2
4
3
45
3
12
3
8
3
24
3
3
4
36
4
9
4
7
4
18
4
2
5
27
5
7
5
5
5
13
5
1
6
18
6
5
6
4
6
7
6
.5
7
15
7
2
7
3.5
7
4
7
.25
8
12
8
1
8
3
8
2
8
.125
Price of A= $18; Price of B = $6; Price of C = $4; Price of D = $24
Ricardo’s Income = $106
Your 99 Problems (P# 6.5)
Units of X
MUx
Units of Y
Muy
1
10
1
8
2
8
2
7
3
6
3
6
4
4
4
5
5
3
5
4
6
2
6
3
Deriving the Demand Curve
Price Per Quantity
Orange Demanded
$2
4
1
6
Price of Orange
$2
$1
DO
0
4
6
Quantity Demanded of Oranges
LO3
6-12
Income and Substitution Effects
OIncome effect
• The impact that a price change
has on a consumer’s real income
OSubstitution effect
• The impact that a change in a
product’s price has on its relative
expensiveness
LO4
6-13
Prospect Theory
OHow people actually deal with life’s
ups and downs
OPeople judge things relative to the
status quo
OPeople experience:
• Diminishing marginal utility for gains
• Diminishing marginal disutility for losses
OPeople are loss adverse
LO5
6-14
Losses and Shrinking Packages
OConsumers see any price increase
as a loss relative to the status quo
OProducers are reducing package
size instead of raising prices
LO5
6-15
Framing Effects and Advertising
OConsumers evaluate events in a
particular mental frame
ONew information alters the frame
in which the consumer defines
whether situations are gains or
losses
LO5
6-16
The Endowment Effect
OMarket transactions may be affected by
the endowment effect because:
• The seller has a tendency to demand
a higher price
• The buyer has a tendency to offer a
lower price
LO5
6-17