ec-20 - 2. 2 nd record 3. 3 rd 2 nd coke 4. 4 th 2 nd...

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P Q MU Cokes 9/30/08 Utility Theory I. Definition a. Utility i. Satisfaction b. Total utility i. Total satisfaction from all units consumed c. Marginal utility (MU) i. Additional satisfaction ii. Change in total utility from consuming one more 1. (^TU)/(^Q) d. Marginal i. Additional, incremental II. Is utility measurable? a. Utility is ordinal, not cardinal III. Model of consumer behavior a. Assume i. Utility is measurable 1. Build theory on false assumption a. No matter- behavior is tested, not assumptions i. Useful insights about behavior ii. Goal of consumer is to maximize utility
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b. Constraints i. Income, prices, time c. How does consumer i. Max U subject to constraints IV.Example a. MU at the Malt Shop i. Cokes Units TU MU Mu C /P c 0 0 - - 1 20 20 20 2 32 12 12 3 37 5 5 4 40 3 3 ii. Change in MU as Cokes Increases 1. MU falls as consumption inc. a. “diminishing marginal utility” V. Graph of MU VI.Add. Example a. Records Units TU MU R MU R /P R 0 0 0 1 7 7 14 2 12 5 10
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3 16 4 8 4 19 3 6 5 21 2 4 6 22 1 2 b. Compare records and Coke i. Which good is consumed 1 st 1. 1 st … coke a. Why i. More “jollies”/dollar
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Unformatted text preview: 2. 2 nd record 3. 3 rd 2 nd coke 4. 4 th 2 nd record 5. 5 th 3 rd record 6. 6 th 4 th record VII. Gain V Sacrifice a. In ratio form : (MU)/(P) i. Consume where the ratio is greatest b. Consumer equilibrium i. (MU)/(P) is equal across all goods 1. All income spend ii. Ex: (MU 1 /P 1 )= (MU 2 /P 2 ) VIII. From MU to Demand a. Mu = another rationale for the negative sloped demand curve i. From coke example 1. Price of cokes falls from $1 to .50 a. 2 cokes doesnt max utility i. 4 cokes and 4 records optimal IX.Using Marginal Utility Theory a. sale of the day b. Swansons salt test X. Summary a. Consumers behave as if they calc MU/P i. Then they consume where the ratio is the biggest b. Economic decision rule i. Compare gain V cost at margin 1. Do it as long as the Marginal benefit is greater than Marginal Cost...
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ec-20 - 2. 2 nd record 3. 3 rd 2 nd coke 4. 4 th 2 nd...

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