2010 post-6a

2010 post-6a - Consumer Theory Consumers optimization...

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Consumer Theory Consumer’s optimization principle: people buy the “best bundle of goods” that they can afford. I. First Approach: A. Utility: a measure of satisfaction B. Marginal Utility (MU): the change in utility resulting from a change in consumption of a g/s (the extra utility from an extra unit) = ∆TU/∆Q. The law of diminishing MU: Holding consumption of other products constant, the utility any consumer derives from successive units of a particular good eventually decreases as total consumption increases Example Slices of Pizza in an evening Total Utility MU 0 0 - 1 20 20 2 35 15 3 46 11 4 52 7 5 56 4 6 57 1 7 57 0
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Consumers want to maximize total utility, but can not have as much as they want of everything, so they adjust spending to maximize utility. If everything had the same price, then maximum utility will be when all MUs are equalized. C. Maximum Utility: when spending is such that the utility obtained from the last dollar spend on each good is equal.
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This note was uploaded on 03/31/2008 for the course ECON 2010 taught by Professor Mertens,wi during the Spring '07 term at Colorado.

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2010 post-6a - Consumer Theory Consumers optimization...

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