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ECON 101 2Midtermreview

The proprietor also makes management decisions and

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Unformatted text preview: utility as the quantity of the good consumed increases the principle of diminishing marginal utility. The Utility- Maximizing Choice • We can find the utility- maximizing choice by looking at the total utility that arises from each affordable combination. • The utility- maximizing combination is called a consumer equilibrium. The Utility- Maximizing Rule: • Call the marginal utility of movies MUM . • Call the marginal utility of pop MUP . • Call the price of movies PM . • Call the price of pop PP . • The marginal utility per dollar from seeing movies is MUM/PM . • The marginal utility per dollar from pop is MUP/PP. Total utility is maximized when: • MUM/PM = MUP/PP If MUM/PM > MUP/PP, • • • • then more on movies and spend less on pop. MUM decreases and MUP increases. Only when MUM/PM = MUP/PP, is it not possible to reallocate the budget and increase total utility. Important thi...
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