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utilmax498 - 32 MARGINAL UTILITY AND OPTIMIZATION Purpose...

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32-1 32 MARGINAL UTILITY AND OPTIMIZATION Purpose: To demonstrate the rule for utility maximization when utility is a cardinal measure of satisfaction. To show the effects on consumer choice of changes in prices and incomes. Computer file: utilmax498.xls Instructions and questions: This problem set is the same as the one preceding it, except in one respect. It is that the accompanying graphical display doesn't use indifference curves, but relies instead on straightforward measures of marginal utility per dollar of the two goods. A simple bar chart shows the values of marginal utility per dollar for each of the goods for any values of income, prices, and consumption. Compared to the use of indifference curves, many people find the approach taken here to be more intuitive in explaining the nature of the optimization problem. The approach taken here is also good for people who like to avoid the discussion of indifference curves entirely in a presentation of consumer choice. If utility is cardinal, we can reformulate the rule for utility maximization into one that is, to some folks at least, more intuitive.
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