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Topic 14

by: John Om

Topic 14 ECON 102

John Om
Penn State
GPA 3.0

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About this Document

all of the notes from topic 14 and the graphs
Introductory Microeconomic Analysis and Policy
Wayne Geerling
75 ?




Popular in Introductory Microeconomic Analysis and Policy

Popular in Economcs

This 4 page Bundle was uploaded by John Om on Friday April 29, 2016. The Bundle belongs to ECON 102 at Pennsylvania State University taught by Wayne Geerling in Winter 2016. Since its upload, it has received 12 views. For similar materials see Introductory Microeconomic Analysis and Policy in Economcs at Pennsylvania State University.

Similar to ECON 102 at Penn State


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Date Created: 04/29/16
Topic 14: Consumer Choice Utility ­ Utility: is the satisfaction or well­being that a consumer receives from consuming a good or  service ­ Utility varies from individual to individual ­ Economists measure this in utils Assumptions ­ 1. Consumers always choose the highest valued alternative (transitivity is often violated) ­ 2. One good can be substituted for another ­ 3. Decisions are made without perfection information ­ 4. The Law of Diminishing Marginal Utility limits consumption Utility Theory ­ Marginal Utility o The additional satisfaction obtained by a consumer from consuming 1 more unit of a  good  Marginal utility = change in total utility / change in number of units consumed o Contentment is hard to measure. Happiness is a balance between economic and personal  factors Point at the top matches x=0 Optimizing Consumption Choices ­ We don’t focus on total utility but the utility we get per $ spent – bang for buck! ­ The way we maximize utility is by solving the 2 following conditions: o 1. MU/P is equal for each item o 2. The total purchase must fall within our budget constraint Maximizing Utility ­ Two goods, pizza and pepsi o Pizza is $2 per slice o Pepsi is $1 per can o You have $10 to spend ­ Consumption of pizza and Pepsi both exhibit diminishing marginal utility o If I consume pizza, MU pizzaalls o If I consume pepsi, MU pepsi lls P1  Pizza 1 P2 = Pepsi 1 P3 or 4 epsi / Pizza 2 **indifferent** P5 = Pepsi 3 The Diamond­Water Paradox ­ Marginal utility, total utility & the diamond­water paradox o Water is essential to life but cheapo o Diamonds are not essential to life but expensive Restaurants ­ Why do fast food restaurants provide “value sizes”? ­ Why do we order so much food? o Maximize total utility o Create low marginal value o Restaurant pass along low marginal costs ­ Why do nicer restaurants serve small amounts? o High marginal value


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