{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

equi-mu-per-\$

# equi-mu-per-\$ - flyow PMHN Mum MlkadaanKuÂ 81nd mow i 1 l...

This preview shows pages 1–2. Sign up to view the full content.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: flyow- PMHN Mum MlkadaanKuÂ§ 81nd) mow i _. 1 l Cahmw 2.0405 Pea-125m awe/6mm- Equalizing Marginal Utility per Dollar A consumerâs total utility is maximized byfollowing the rule Spend all the available income and equalize the mar- ginal utility per dollar for all goods. The marginal utility per dollar is the marginal utility from a good divided by its price. For example, Lisaâs marginal utility from seeing 1 movie a. month, M UM, is 50 units of utility. The price of a movie, PM, is \$6, which means that the marginal utility per dollar from 1 movie a month, M UM/PM, is 50 units divided by \$6, or 8.33 units of utility per dollar. You can see Why followingthis rule maximizes total utility by thinking about a situation in which i; g '. if}. E: E s l: E 5.5;" Lisa has spent all her income but the marginal utiliâ ties per dollar are not equal. Suppose that Lisaâs marâ ginal utility per dollar for soda, M U 5/135, exceeds that for movies. By spending a dollar more on soda and a dollar less on movies, her total utility from soda rises and her total utility from movies falls. But her utility gain from soda exceeds her utility loss from movies, so her total utility increases. Because sheâs consuming more soda, her marginal utility from soda has fallen. And because she sees fewer movies, her marginal utilâ ity from movies has risen. Lisa keeps increasing her consumption of soda and decreasing her consump- tion of movies until the two marginal utilities per dollar are equal, or when Mm_Mm m aâ Table 7.3 calculates Lisaâs marginal utility per dollar for each good. Each row exhausts Lisaâs income of \$30. In row B, Lisaâs marginal utility from movies is 50 units (use Table 7.1 to calculate the marginal utilities). Because the price of a movie is \$6, Lisaâs marginal utility per dollar for movies is 50 units divided by \$6, which is 8.33. Marginal utility per dollar for each good, like marginal utility, decreases as more of the good is consumed. Lisa maximizes her tOtal utility when the mar- ginal utility per dollar for movies is equal to the mar- ginal utility per dollar for sodaâpossibility C. Lisa consumes 2 movies and 6 sixâpacks. TABLE 7.3 Equalizing Marginal Utilities per Dollar Movies Soda (\$6 each) (\$3 per six-panic) Marginal Marginal utility utility Marginal per Marginal per Quantity utility dollar Six-packs utility dollar A 0 0 l0 I5 5.00 B l 50 8.33 8 l7 5.67 C 2 38 6.33 6 l9 6.33 D 3 33 5.50 4 28 9.33 E 4 29 4.83 2 42 l4.00 F 5 0 0 25 4.l7 MAXIMIZING UTlLI'IâY 159 Figure 7.4 shows why the rule âequalize marginal utility per dollar for all goodsâ works. Suppose that instead of consuming 2 movies and 6 sixâpacks (posâ sibility C ), Lisa consumes 1 movie and 8 sixâpacks (possibility 3). She then gets 8.33 units of utility per dollar from movies and 5.67 units per dollar from soda. Lisa can increase her total utility by buying less soda and seeing more movies. If she sees one addiâ tional movie and spends less on soda, her total utility from movies increases by 8.33 units per dollar and her total utility from soda decreases by 5.67 units per dollar. Her total utility increases by 2.66 units per dollar, as shown by the blue area. Or suppose that Lisa consumes 3 movies and 4 sixrpacks (possibility D). In this situation, her Equalizing Marginal Utilities per Dollar FIGURE 7.4 \K ; t'niyieconlob F" o o E" o o Marginal uliliiy per dollar (unlls 0F ullllly per dollar] Maximum 10ml uďŹliiy' Utility-gain -- âlromrmore- 8.33 sodoion'd' 7 âlewermovies 6.33 5.67 from more : movieszond 5 less soda ' Soda â El: " Possibilily A B C D E If Lisa sees l movie and drinks 8 six-packs (possibility 8), her marginal utility per dollar for movies exceeds her marâ ginal utility per dollar for soda. She can get more total util- ity by seeing one more movie and drinking less soda. If she drinks 4 six-packs and sees 3 movies (possibility D). her marginal utility per dollar for soda exceeds her marginal utility per dollar for movies. She can increase her total util- ity by seeing one fewer movie and drinking more soda. When Lisaâs marginal utility per dollar for both goods is equal, her total utility is maximized. marginal utility per dollar for movies (5.50) is less than her marginal utility per dollar for soda (9.33). Lisa can now increase her total utility by seeing one less movie and spending more on soda, as the green area shows. ...
View Full Document

{[ snackBarMessage ]}

### Page1 / 2

equi-mu-per-\$ - flyow PMHN Mum MlkadaanKuÂ 81nd mow i 1 l...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online