Utility MAximizing Rule
Download as PPTX, PDF1 like1,549 views
This document discusses consumer utility maximization and budget constraints. It assumes consumers will try to get the most value for their money given limited incomes. The utility maximizing rule is that marginal utility gained from the last money spent on each good should be equal. Formulas show the relationship between marginal utility per price for different goods. Examples then demonstrate how consumers allocate spending across goods X and Y to maximize total utility for different income levels. Indifference curves are introduced to show combinations of goods that provide equal utility.
Utility MAximizing Rule
- 2. Assumptions: Consumers will try to get the most value for their money. Consumers’ income are limited. (Face Budget Constraint) Consumers have clear preferences for various goods and services, they know their MU Consumers can choose alternative goods.
- 3. Utility Maximizing Rule: Maximum is reached when MU gained from the last money spent is equal across all goods and services purchased. Last money spent on each product purchased yields the same amount of extra MU
- 4. Formula: U(X,Y; Ceteris Paribus) = U(X,U; other things) MU of product X / price of product X = MU of product Y/ Price of product Y
- 5. SampleGood X(Price= 1Php) Good Y (Price = 2Php) Quantity MU MU/P TL UTILITY Quantit y MU MU/P TL UTILITY 1 8 8 8 1 10 5 10 2 7 7 15 2 8 4 18 3 6 6 21 3 6 3 24 4 5 5 26 4 4 2 28 5 4 4 30 5 3 1.5 31 6 3 3 33 6 2 1 33 7 2 2 35 7 1 0.5 34
- 6. MUx / Px = MUy / Py X(Price 1Php) Y(Price 2Php) MU/P A 5/1 10/2 5 B 4/1 8/2 4 C 3/1 6/2 3 D 2/1 4/2 2
- 7. INCOME: UTILITY SUM A: X=4, Y=1, $1x4+$2x1 = $6 26+10=36 B: X=5, Y=2, $1x5+$2x2 = $9 30+18=48 C: X=6, Y=3, $1x6+$2x3 = $12 33+24=57 D: X=7, Y=4, $1x7+$2x4 = $15 35+28=63
- 8. Analysis: As the income increases, total utility increases also. Therefore, higher income groups in our society usually enjoys more products and have higher total utility levels.
- 9. Indifference Curve: - An indifference curve is a curve that shows all combinations of goods that provide the same level of utility.
- 10. X Y 2 6 3 4 4 3 6 2 3 3 4 4
- 12. Point: A= A,B,C,D= Equally Happy F= Very E= Less Goods
- 13. Arigatou