Utility maximization
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This document discusses concepts related to consumer choice and utility maximization. It provides information on: - Consumers attempting to maximize utility based on their budget constraint. - Indifference curves and how consumers choose based on preferences within the constraints of their budget. - Why consumers cannot buy all goods they want due to scarcity and must consume where their indifference curve is tangent to their budget constraint in order to maximize utility. - Calculating utility maximization using calculus or a formula where the marginal utility per dollar spent on each good is equal.
Utility maximization
- 1. It can not be a financial asset, it much be an actual good. Estimate price on board
- 2. What if Warren Buffett is too busy to go shopping so he gives you the cash. Would you still buy the one good? Why or why not? Budget constraint Does money always increase utility? Many goods vs. few or one for consumers Ted.org video clip
- 3. Utility Maximization Consumers attempt to maximize their utility based on their budget constraint Consumer surplus
- 4. 11/26/11 Utility maximization Pareto efficient?
- 5. Indifference curves Theory of consumer choice Chapter 21 People face tradeoffs People choose based on preferences Rules of I.C.’s: 1. Higher the better 2. Downward sloping “substitution effect” 3. I.C.’s do not cross “More goods are better” 4. Bowed inward “MRS gets smaller as you consume” Factors of change: Population Income Preferences
- 6. Why can’t we buy all the goods we want? Scarcity again! Consume where indifference curve is tangent to budget constraint “Utility maximization” Complicated b/c preferences change
- 7. Calculating Utility Maximization Use calculus to find tangency of indifference curve against the budget constraint OR Use easy formula To obtain the greatest utility the consumer should allocate money income so that the last dollar spent on each good or service yields the same marginal utility. Util maximization:
- 8. Assumptions: A consumer can buy oranges or apples A consumer wants $10 to spend on fruit at the farmers market A consumer prefers oranges to apples How can this consumer maximize their utility?
- 10. Calculating Utility Maximization Budget $420 on tickets/year $60 per game Games 1 2 3 4 5 6 7 Total Utility 10 19 27 34 40 45 49 Marginal Utility 10 9 8 7 6 5 4 Total MU/Price Games Utility 0.166667 1 9 0.15 2 18 0.133333 3 25 0.116667 4 31 0.1 5 36 0.083333 6 40 0.066667 7 44 $60 per game Marginal Utility 9 9 7 6 5 4 4 MU/Price 0.15 0.15 0.116667 0.1 0.083333 0.066667 0.066667
- 15. Mankiw Pages 464-465 #15 then #12 EC #14