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2011-10-02 22-38-41 26

2011-10-02 22-38-41 26 - 3 slices of pizza and 4 cups of...

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Unformatted text preview: 3 slices of pizza and 4 cups of coke will give a total utility of 96. We can compactly summarize the two conditions for maximizing utility as follows: 1. MUPizza/PPim = MUCoke/PCokc 2. Spending on pizza + spending on coke= Amount available to be spent The first condition shows that the marginal utility per dollar spent must be the same for both goods. The second condition is the budget constraint, which states that total spending on both goods must be equal to the amount available. Income effect: The change in the quantity demanded of a good that results from the effect of a change in price on consumer purchasing power, holding all other factors constant. Substitution effect: The change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods, holding constant the effect of the price change on consumer purchasing power. Social Influences on decision making: 0 The effects of celebrity endorsements I Network externalities: Network extemalities exist when the usefulness of a product increases with the number of consumers who use it. Behavioral ecouomics: The study of situations in which people act in ways that are not economically rational. - Consumer’s commonly commit the following three mistakes when making decisions: 1. They take into account monetary costs but ignore non monetary opportunity costs ...
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