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Maximizing Utility
Preferences
A households preferences determine the benefits or satisfaction a
Total Utility
Total utility is the total benefit a person gets from the
consumption of goods. Generally, more consumption gives more
utility.
Maximizing Utility
Table 1 provides an example
Maximizing Utility
Marginal Utility
Marginal utility is the change in total utility that results from a
one-unit increase in the quantity of a good consumed.
As the quantity consumed of a good increases, the marginal utility
from consuming it decreases.
We call this decrease in marginal utility as the quantity of the good
consumed increases the principle of diminishing marginal utility.
Maximizing Utility
Table 8.1 provides an
Maximizing Utility
Figure 8.1(a) shows a total
Maximizing Utility
Figure 8.1(b) illustrates
Maximizing Utility
The key assumption of marginal utility theory is that the household
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Maximizing Utility
Table 8.2 shows Lisas utility-
maximizing choice.
Lisa has $40 a month to spend
on movies and soda.
The price of a movie is $8 and
the price of soda is $4 a case.
Each row of the table shows a
combination of movies and soda
that exhausts Lisas $40.
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Maximizing Utility
Lisa chooses the combination
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Maximizing Utility
Choosing at the Margin
A consumers total utility is maximized by following the rule:
Spend all available income.
Equalize the marginal utility per dollar for all goods.
The marginal utility per dollar is the marginal utility from a good
divided by its price.
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Maximizing Utility
The Utility-Maximizing Rule:
Call the marginal utility of movies MUM .
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Maximizing Utility
Total utility is maximized when:
MUM/PM = MUS/PS
Table 8.3 shows why the
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Maximizing Utility
If MUM/PM > MUS/PS,
then spend less on soda
MUM/PM = MUS/PS,
is it not possible to reallocate
the budget and increase total
utility.
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Maximizing Utility
If MUS/PS > MUM/PM,
then spend more on soda and
less on movies.
MUS decreases and
MUM increases.
Only when
MUM/PM = MUS/PS,
is it not possible to reallocate
the budget and increase total
utility.