ecn 203 chapter 2 - ECN 203 Chapter 2 Individual Choice...

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ECN 203 - Chapter 2: Individual Choice Purpose : Develop a model to describe how individuals make choices….allocate scarce resources. Start with a simple model, then allow for more complex decisions. Assumption that always holds: Individuals are rational -- always make the best choice. Key Concepts of the Model Total Utility (TU) – an individual’s total satisfaction/ happiness - Utils : measure of utility. Marginal Utility (MU) – a change in TU resulting from a change in the quantity (Q)…… Formula : MU = ΔTU/ΔQ. Diminishing MU – an assumption that MU diminishes with additional units consumed. Ex.1: Decision with One Option (No Scarcity) Following table shows the total utility Jack derives from each slice of pizza he eats. Determine Jack’s marginal utility for each slice of pizza. Fill in MU column. If pizza is free, when should Jack stop eating pizza? Decision Rule with One Option (No Scarcity) Jack should consume pizza up to the point where his TU is maximized (no utility left to gain from the additional unit). Decision rule : MU=0 (making a decision at the margin). Referred to as satiation or bliss point. 1
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Ex. 2: Decision With N Options (No Scarcity) Following graphs represent the MU for each hour spent doing two activities: - Which activity is initially more satisfying?
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