H12ConsumerChoice - 44 Model of Consumer Choice Utility -...

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1 Model of Consumer Choice Model of Consumer Choice 44 Utility - numerical measure of satisfaction; bigger is better Marginal Utility additional utility from additional unit of good Law of Diminishing Marginal Utility marginal utility diminishes as more of a good is consumed Rational spending rule XY MU MU = PP Maximize Utility - choose the best bundle affordable Budget set - spend entire income MU MU > buy more X ; YX MU MU > buy more Y Budget Line Budget Line Marginal Utility Bagel OJ 1st 2nd 3rd 4th 5th income = 100 Janets price Bagel = 20 Janets price OJ = 20 Janets MU MU = entire income spent Conditions for utility maximization What if consumer chooses another affordable bundle? OJ  Utility Bagel  Utility the consumer is worse off Bagels OJ 45 Budget line – bundles that exactly spend your income Model of Consumer Choice 45 0 6 12 18 24 30 36 0 4 8 1 21 62 02 4 Quantity of Gasoline Quantity of Pizza Gallons of Gasoline Slices of Pizza 03 6 43 0 82 4
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H12ConsumerChoice - 44 Model of Consumer Choice Utility -...

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