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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.
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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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