ECN_203__2__Modeling_Individual_Choice

ECN_203__2__Modeling_Individual_Choice - Chapter 2:...

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Chapter 2: Modeling Individual Choice Purpose : Develop model of individual choice. Starting point is a simple model with with strong assumptions of no scarcity, one choice, no production, no future, no risk We’ll then relax each one of these assumptions to make our model more realistic.
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What Drives Our Choices? Utility (TU) -- satisfaction or happiness Consumption -- act of deriving utility from goods and services Assume all individuals are rational -- seek to maximize their utility
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My Total Utility From Coffee Coffee (Cups) Total Utility (Utils) 0 0 1 100 2 185 3 245 4 295 5 325 6 340 7 340 8 320
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Marginal Utility Marginal Utility (MU) -- the change in total utility (measured in total utils- TU) resulting from a change in the quantity of an individual good (Q) consumed. MU = ΔTU/ΔQ. How does your total utility change with each successive unit consumed?
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Diminishing Marginal Utility (Assumption) Diminishing marginal utility --utility we derive of a good or service diminishes with each successive unit. E.g. Coffee consumption example
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My Marginal Utility From Coffee Coffee (Cups) Total Utility Marginal Utility 0 0 --- 1 100 100 2 185 85 3 245 60 4 295 50 5 325 30 6 340 15 7 340 0 8 320 -20
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Marginal and Total Utility Marginal utility from each successive cup of coffee falls, total utility increases up until the 7 th cup. Positive marginal utility adds to the total Decision: Where to stop drinking coffee?
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Good Consume up to the point before total utility falls (beyond this point will take away from our total satisfaction. Decision rule: MU=0.
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This note was uploaded on 04/18/2008 for the course ECN 203 taught by Professor Evensky during the Spring '07 term at Syracuse.

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ECN_203__2__Modeling_Individual_Choice - Chapter 2:...

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