CN_intromicro_ch7

# CN_intromicro_ch7 - 1 Chapter 7 Utility Utility Pleasure or...

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Unformatted text preview: 1 Chapter 7 Utility Utility- Pleasure or satisfaction obtained from consuming goods and services. It is depen- dent upon a particular individual’s tastes and preferences. Rational Choice- The consumer makes consumption decisions that maximize utility. We will always assume that consumers are rational, that is they always opt for the rational choice. Number of Total Utility Marginal Utility DVD’s Watched (utils per week) (utils per week) per Week- 1 10 (10-0) = 10 2 16 (16-10) = 6 3 19 (19-16) = 3 4 20 (20-19) = 1 5 20 (20-20) = 0 6 18 (18-20) = -2 2 Marginal Utility- The change in total utility due to a a one-unit change in the quantity of a good or service consumed. Marginal Utility = Δ in total utility Δ in 1 unit consumed Law of Diminishing Marginal Utilities- The extra benefit from consuming an additional unit of a good will eventually decline. Good – A commodity consumed that increases total utility. It has a positive marginal utility. Bad – A commodity consumed that decreases total utility. It has a negative marginal utility. How many DVD’s should this person watch each week if DVD’s are free? This consumer obtains 20 units of utility from watching 4 DVD’s per week and 20 units from watching 5 per week. So either of these would be rational choices. Bundles that are equally preferred are said to be indifferent. So, this consumer is indifferent between watching 4 or 5 DVD’s per week. Notice this happens when the marginal utility stops being positive. As long as the marginal utility of a product is positive we derive some benefit from consuming it. Decision Rule – If indifferent between performing an action and not performing the action we will assume the individual performs the action. (In the above case the person will watch 5 DVD’s) 3 Assume: Utility directly corresponds to Dollars (1 util = \$1) How many DVD’s should this person watch each week if DVD’s cost \$5 each? If the person watches 1 DVD then he will receive \$10 of benefit and it cost him \$5 to obtain this benefit. So the individual should watch at least 1 DVD’s. If the person watches 2 DVD’s then he receives a \$6 benefit and only had to give up \$5. So the individual will watch a second movie this week. If the person watches 3 DVD’s then he receives a \$3 benefit and gave up \$5. If the per- son chose to watch a 3 rd DVD the additional cost outweighs the additional benefit so this individual should only watch 2 DVD’s per week. General Maximization Rule Marginal Benefit = Marginal Cost MB = MC In the above case the additional benefit was an increase in utility and the additional cost was the price of the DVD. So the rule for Utility Maximization is: MU = P Obtaining Utility from Marginal Utility We know how to calculate marginal utility from total utility but it is also possible to go...
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## This note was uploaded on 10/14/2010 for the course DDF 1124-445 taught by Professor Gorthermclays during the Spring '10 term at Florida College.

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CN_intromicro_ch7 - 1 Chapter 7 Utility Utility Pleasure or...

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