Chapter 7.docx - Economics 2001.01 Consumer Behavior Utility Basics o Utility is a measure of the amount of satisfaction a person derives from something

Chapter 7.docx - Economics 2001.01 Consumer Behavior...

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Economics 2001.01 10/4/16 Consumer Behavior Utility Basics o Utility is a measure of the amount of satisfaction a person derives from something EX: You eat a hamburger and you like it, it gives you a positive utility Rational individuals maximize utility when making choices EX: If playing soccer for the next hour yields more utility than playing baseball, rational individuals will play soccer Revealed preferences o Utility is hard to measure o Observe what people actually do o The principle of revealed preferences is that people’s preferences can be determined by observing their choices and behavior Bundle o A bundle is a unique combination of goods and services that a person could choose to consume o EX: Buy a coke, a hamburger, and fries Utility functions o A utility function is a formula for calculating the total utility that a particular person derives from consuming a combination of goods and services o Utility functions quantify preferences o EX: 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 her total utility = (3x1) + (2x2) + (8x2) = 23 Marginal utility o Marginal utility is the charge in total utility from consuming an additional unit of a good or service Diminishing Marginal utility o The additional utility gained from consuming successive units of a good service tends to be smaller than the utility gained from the previous unit or service o Sometimes, marginal utility becomes negative, you no longer like the item o
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