Ecom- Exam 2 Notes - Chapter 7 Utility Basics Utility measure of amount of satisfaction a person derives from something Incorporates emotions and

Ecom- Exam 2 Notes - Chapter 7 Utility Basics Utility...

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Chapter 7 Utility Basics Utility : measure of amount of satisfaction a person derives from something Incorporates emotions and sensations Cant be compared across individuals Rational individuals maximize utility when making choices. o For example, if playing soccer for the next hour yields more utility than playing baseball, rational individuals will play soccer. Utility Function : formula for calculating the total utility that a person derives from consuming a combination of goods and services Utility measurements are relative Bundle: unique combination of goods and services For example, suppose Sarah receives a utility of 3 for each serving of mac-n-cheese she eats, 2 for broccoli, and 8 for ice cream. o If she eats 1 serving of mac-n-cheese, 2 servings of broccoli, and 2 of ice cream, then: total utility = (3 x 1) + (2 x 2) + (8 x 2) = 23 Marginal Utility : the change in total utility from consuming an additional unit of a good or service Diminishing marginal utility: the additional utility gained from consuming successive units of a good or service tends to be smaller than the utility gained from the previous unit or service. sometimes it becomes negative Revealed Preferences Revealed preference: people’s preferences can be determined by observing their choices and behavior Utility is hard to measure Maximizing utility with Constraints People have many wants and are constrained by the time and money available to them. Budget Constraint: provides all possible combinations of goods and services and consumer can buy with a given income Responding to changes in Income When income increases, more bundles of goods/services are affordable When income decreases, consumers will have to cut consumption of things A change in income is represented by shifting the entire budget line outward Responding to changes in Prices Income effect : occurs as a consumption of changes from increased effective wealth due to a lower price Substitution effect: change in consumption that results from a change in the relative price of goods o The opportunity cost of consuming a good, changes as prices change. o A price change causes the budget line to rotate. Utility and Society Outside Perception o What others think of your purchases o How much others have Inward preferences o How you prefer to spend money Utility, Altruism, and Reciprocity Altruism: a motive for action in which a person’s utility increases simply because someone else’s utility increases. Reciprocity : responding to another’s action with a similar action Example Homework Problems (Chapter 7)
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