Chapter 7: Utility
Chapter 7: Utility 2001.01
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This 6 page Class Notes was uploaded by annehohler on Friday October 2, 2015. The Class Notes belongs to 2001.01 at Ohio State University taught by Dr. Ida Mirzaie in Summer 2015. Since its upload, it has received 28 views. For similar materials see Microeconomics in Economcs at Ohio State University.
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Date Created: 10/02/15
MICRO OH 7 l Chapter 7 Utility Utility a way of describing the value that a person places on something value of satisfaction people make decisions are made based on utility the desire to maximize utility drives decisions but it s not always rational emotions weigh more than rationality Thinking Strategically considering what other people are doing when making decisions gt Why not give people cash and let them decide what to do with it because in the broader view of utility cash is not the best gift remember emotions weigh heavy here SENTIMENTALITY comes from giving gifts other than money valuing objects more than money MONEY ISN T VALUE the OPPORTUNITIES we get in what we buy with the money is where the value comes from Hence utility comes from the experience Generally the things you like increase utility Utility Maximization doingdeciding what activities to do that will maximize utility or maximize satisfaction On a graph it s the data before the level of satisfaction becomes negative where llax Utility is O Rational Utility Maximizers people baseline assumption of how people think of the world it is not always true because people can lack information or lack in self control in decision making i am so sorry for my lack of self control MICRO OH 7 2 Utility is hard to measure because people are hard to measure When gauging other people s utilities we assume what they re doing is maximizing their utility Thus we buy them what maths their observed activities Basically we buy what we think they ll like based on what we know about them Revealed Preference idea that people s preferences can be determined by observing their choices and behavior unique and hard to measure Problem is PEOPLE ARE NOT CONSISTENT They re always changing So is there more weight on what people say or what they do Utility Function formula for calculating the total utility that a particular person derives from consuming a combination of goods andor services QUANTITATIVE Bundle unique combo of of goodsservices a person could choose to consume Marginal Utility a change in total utility that comes from consuming one additional unit or service MARGINAL ADDITIONAL Diminishing Marginal Utility principle that the additional utility gained from consuming successive units of a goodservice tends to lessen each additional item from the initial utility Enjoyment DECREASES with each additional goodservice MICRO CH 7 300 250 W 200 V Total Joy 150 100 No of pizza slice So this is the curve that shows the maximum utility for this individual with and number Of Of pizza Their MU game is obviously weak but anyway P 175 1 5 1 25 1 0 75 And this is generally what s happening between enjoyment and marginal utility It s a negative or inverse relationship This also shows that their willingness to pay for the item is decreasing as they keep consuming However the price of the MICRO OH 7 item has not changed lt s iust their willingness to keeping paying for the item at the set price is decreasing Budget Constraint line composed of all possible combinations of goodsservices that a consumer can buy with their income Looks at someone s bundle and works like a PPF it shows different ways to combine products to max opportunity N 3 Affc rda hie Cups of tea 8 23 Prctcrmd Lo I but st lll affordalble I I l p 10 70 quot0 Crumpets STEPS TO SOLVING BUDGET CONSTRAINTS TO FIND BEST WAY TO USE MONEY Have a budget Make a budget line Look at feasible bundles combos on the budget line Admire total utility for each combination U HePJNH Choose the bundle that maxs out total utility Basically MTORO OH 7 5 If this guy has 120 here are his options 1 Buy all tea no crumpets This means for 120 he can buy 30 cups of tea but no crumps Buy all crumps no tea This means for 120 he can buy 30 crumps but no tea BUT he can also buy cramps tea for 120 he can buy 15 cups of tea and 15 crumps WHEN INCOME INCREASES MORE AFFORDABLE AND BIGGER BUNDLES BECOME AVAILABLE AND GET THIS THE SLOPE STAYS THE SAME woah now micro needs to chill If the Maximum Utility of item A divided by its price is larger than the Maximum utility of item B divided by its price then the Quantity of A will increase Remember that when income increase the demand for Normal goods increases and the demand for Inferior goods decreases Income Effect change in consumption that results from increased effective wealth ie income increase due to lower prices Likein a hypothetical situation someone with the initial budget pays for a good that s 15 And that s that BUT when she gets an income increase of 5 though she s still paying 15 it feels to her like she s paying 10 because she s 5 richer An Increased Income shifts the budget curve RIGHT and a Decreased Income shifts the budget curve LEFT Substitution Effect change in consumption that results from change in relative price of goods the opportunity cost has changed therefore the person gets more utility for their buck MICRO OH 7 6 Veblen goods when people choose to consume more of a good when it s price increases an exception to the rule basically items that have a status symbol are Veblen goods like Coach Chanel Rolex You know exactly what they are THE IDEA OF UTILITY IS FLEXIBLE AlID BROAD Utility is also a mixture of outside perceptions other people s reactions and inner preferences direct effect Altruism motive for action in which a person s utility increases simply because someone else s utility increases bragging rights desired one upping someone It s a selfish image conscious motive but sometimes it s unselfish and one wishes well for another Reciprocity responding to another s actions with a similar action matching someone tit for tat Doing good for someone who did good for you Or doing badly for someone who screwed you over Either are under this category Calculating Utility Functions Example If someone has the option of choosing to eat 3 units of item x 2 of unit y and 8 of unit 2 and she chooses l of unit x 2 of unit y and 2 of unit 2 then 3XI2X28X223 total offered of x times chosen amount of x plus total offered of y times chosen amount of y plus total offered of 2 times chosen amount of z total utility
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