08ECO100OutlineConsumerChoiceI

# E income and prices 2 law of diminishing marginal

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Unformatted text preview: information, budget (i.e., income) and prices) 2 Law of diminishing marginal utility: (eventually) the marginal utility obtained by consuming additional units of a good declines Example Q --1 2 3 4 Total Utility -------------20 38 53 55 Gazzale (University of Toronto) Marginal Utility ------------20 18 15 2 ECO100: Consumer Choice I 7 / 21 Utility “Constrained” Utility Maximization Dollars are a scarce resource income = \$7 3 tacos, 2 ice cream --------------------income = \$9 if buy taco #4 must buy taco #5 -&gt;14 utils or buy ice cream #3 =&gt;16 utils Gazzale (University of Toronto) Q 1 2 3 4 5 6 Tacos: Pt = \$1 TU MU MU/P 29 29 29 46 17 17 58 12 12 67 9 9 72 5 5 73 1 1 ECO100: Consumer Choice I Ice Cream: Pic = \$2 TU MU MU/P 30 28 30 15 54 24 12 70 16 8 80 10 5 88 8 4 90 2 1 8 / 21 Utility General Outcome Assuming partial units can be purchased Utility-maximizing rule With prices PX and PY , for any X and Y that you purchase, {X ∗ , Y ∗ } maximizes utility only if MUX MUY = at {X ∗ , Y ∗ } PX PY “Proof by contradiction” ￿ ￿ ˆˆ That is, you say X , Y maximizes utility, but you also say ￿ ￿ MUX ˆˆ &gt; MUY at X , Y . . . PX PY 12 &gt; 10 --------------- \$1 less y =&gt; -10utils \$1 more x =&gt; +12 utils increase spending x =&gt; more x = MUx decrease decrease spending y =&gt; less y = MUy increase Gazzale (University of Toronto) ECO100: Consumer Choice I 9 / 21 Utility A Word of Caution Assumption: Computer purchases must be in integers: 1,2, or 3 MacBooks is ﬁne, but not .75 MacBooks. You are a utility maximizer who purchases a wide variety of goods and services. Assume you are deﬁnitely buying a computer, and are considering 2 options. The MacBook Air costs \$1000 and will give you 2000 utils. The Dell Vostro costs \$600 and will give you 1000 utils. Which of the following is deﬁnitely true? A You will deﬁnitely purchase the MacBook. B You will deﬁnitely purchase the Dell. C While you will purchase a computer, either the Dell or the MacBook c...
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## This note was uploaded on 06/10/2013 for the course AST 201 taught by Professor Abraham during the Fall '08 term at University of Toronto- Toronto.

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