10 Consumer Choice

# 10 Consumer Choice - Consumer Choice 11:58 PM The...

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Consumer Choice 2/17/11 11:58 PM The Diamond-Water Paradox The paradox: Why are diamonds expensive and water cheap, even though diamonds are less “useful” to the worlds population than water is?”! How can this be explained??? Utility : a numerical indicator of a person’s preferences in which higher levels of utility indicate a greater preference Derivation of Utility from Consuming Grapes and Bananas Total Utility: utility received from consuming a good. Ex. 2 lbs grapes & 2 lbs bananas Marginal Utility : an increase in utility when consumption of a good increases by one unit. Ex. the marginal utility of consuming the third pound of grapes is 30 - 27 = 3 Important Properties of Utility Utility can be used to rank alternative combinations o The consumer prefers four pounds of grapes and one pound of bananas (utility value = 25) to one pound of grapes and two pounds of bananas (utility = 23).

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10 Consumer Choice - Consumer Choice 11:58 PM The...

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