10/1/2014

1
Question from Monday
During a football game, it starts to rain and
the temperature drops. The concession stand
raises the price of coffee from 50 cents to 75
cents a cup. They sell more quantity than
ever before. Which answer explains this?
A.The supply of coffee increased.
B.The demand for coffee increased.
C.The supply for coffee decreased .
D.The demand curve for coffee was elastic.
E.The demand curve for coffee was inelastic.
Consumer Choice and Utility
Maximization
2
10/1/2014
2
The Law of DIMINISHING UTILITY
3
Would you see the movie three times?
Notice that the total benefit is more than the
total cost but you would NOT watch the movie
the 3
rd
time.
Thinking at the Margin
# Times
Watching Movie
Marginal
Utility
Price
1st $30 $10
2nd $15 $10
3rd $5 $10
Total $50 $30
10/1/2014
3
Calculate Marginal Utility
# of Slices of
Pizza
Total Utility
(in utils)
Marginal
Utility/Benefit
0 0
1 8
2 14
3 19
4 23
5 25
6 26
7 26
8 24
How many pizzas would you buy if the price
per slice was $2?
5
Calculate Marginal Utility
# of Slices of
Pizza
Total Utility
(in dollars)
Marginal
Utility/Benefit
0 0 0
1 8 8
2 14 6
3 19 5
4 23 4
5 25 2
6 26 1
7 26 0
8 24 -2
How many pizzas would you buy if the price
per slice was $2?
Marginal Cost
$2
$2
$2
$2
$2
$2
$2
$2
$2
6
10/1/2014
4
Calculate Marginal Utility
# of Slices of
Pizza
Total Utility
(in dollars)
Marginal
Utility/Benefit
0 0 0
1 8 8
2 14 6
3 19 5
4 23 4
5 25 2
6 26 1
7 26 0
8 24 -2
How many pizzas would you buy if the price
per slice was $2?
Marginal Cost
2
2
2
2
2
2
2
2
2
You will continue to
consume until
Marginal Benefit =
Marginal Cost
7
CONSUMER BEHAVIOR
You plan to take a vacation and want to maximize
your utility. Based on the info below, which should
you choose?
Destination
Marginal Utility
(In Utils)
Price
Tahiti 3000 $3,000
Chicago 1000 $500
Marginal Utility
Per Dollar
1 Util
2 Utils
8
10/1/2014
5
CONSUMER BEHAVIOR
You plan to take a vacation and want to maximize
your utility. Based on the info below, which should
you choose?
Destination
Marginal Utility
(In Utils)
Price
Tahiti 3000 $3,000
Chicago 1000 $500
Marginal Utility
Per Dollar
1 Util
2 Utils
Calculating Marginal Utility Per Dollar allows
you to compare products with different prices.
9
If you only have $25, what combination of
movies and go carts maximizes your utility?
Utility Maximization
# Times
Going
Marginal
Utility
(Movies)
MU/P
(Price =$10)
Marginal
Utility
(Go Carts)
MU/P
(Price =$5)
1st 30 10
2nd 20 5
3rd 10 2
4th 5 1
$10 $5
10/1/2014
6
If you only have $25, what combination of
movies and go carts maximizes your utility?
Utility Maximization
# Times
Going
Marginal
Utility
(Movies)
MU/P
(Price =$10)
Marginal
Utility
(Go Carts)
MU/P
(Price =$5)
1st 30 3 10 $2
2nd 20 $2 5 $1
3rd 10 $1 2 $.40
4th 5 $.50 1 $.20
$10 $5
If you only have $25, what combination of
movies and go carts maximizes your utility?
Utility Maximization
# Times
Going
Marginal
Utility
(Movies)
MU/P
(Price =$10)
Marginal
Utility
(Go Carts)
MU/P
(Price =$5)
1st 30 3 10 2
2nd 20 $2 5 $1
3rd 10 $1 2 $.40
4th 5 $.50 1 $.20
$10 $5
10/1/2014
7
If you only have $25, what combination of
movies and go carts maximizes your utility?
Utility Maximization
# Times
Going
Marginal
Utility
(Movies)
MU/P
(Price =$10)
Marginal
Utility
(Go Carts)
MU/P
(Price =$5)
1st 30 3 10 2
2nd 20 2 5 1
3rd 10 1 2 .40
4th 5 .50 1 .20
$10 $5
Utility Maximizing Rule
The consumers money should be spent so that the
marginal utility per dollar of each goods equal each
other.
MUx = MUy
14
P
x
P
y
Assume apples cost $1 each and oranges cost $2 each. If the consumer has $7, identify the
combination that maximizes utility.
10/1/2014
8
Utility Maximizing Rule
The utility maximizing rule assumes that you always
consume where MU/P for each product is equal
15