Module
Micro: 15
Econ:
51
Utility Maximization
KRUGMAN'S
MICROECONOMICS for AP*
Margaret Ray and David Anderson
What you will learn
in this Module:
• How consumers make choices about the
purchase of goods and services
• Why a consumer’s goal is to maximizing
utility
• Why the principle of diminishing
marginal utility applies to the
consumption of most goods and services
• How to use marginal analysis to find the
optimal consumption bundle
Maximizing utility
In the Theory of
Consumer Choice,
consumers’ goal is
to maximize their
utility.
Utility
• Utility: a measure of the satisfaction the
consumer derives from consumption of goods
and services.
• Utility and Consumption
• The principle of diminishing marginal utility –
Definition of 'Law Of Diminishing Marginal Utility‘
A law of economics stating that as a person increases consumption of
a product - while keeping consumption of other products constant there is a decline in the marginal utility that person derives from
consuming each additional unit of that product.
Budgets
• The budget line
• The optimal consumption bundle
The consumer’s
challenge is two-fold:
Good Y
B
C
A
1. Find the bundles of
goods that are
affordable, given
income and prices, and
2.Choose the bundle
that provides the
highest utility.
Good X
Spending the Marginal Dollar
The “utility maximization rule” says
that the consumer should spend all
of his income on two goods such
that:
• Marginal utility
• MU per dollar
• Optimal consumption
MU/P is equal for both (all) goods.
As long as one good provides
more utility per dollar than another,
the consumer will buy more of the
first good; as more of the first
product is bought, its marginal
utility diminishes until the amount
of utility per dollar just equals that
of the other product.
Definition of 'Law Of Diminishing Marginal
Utility‘
Figure 51.1 Cassie’s Total Utility and Marginal Utility
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
A law of economics stating that as a
person increases consumption of a
product - while keeping consumption of
other products constant - there is a
decline in the marginal utility that person
derives from consuming each additional
unit of that product.
Figure 51.2 The Budget Line
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Table 51.1 Sammy’s Utility from Clam and Potato Consumption
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Table 51.2 Sammy’s Budget and Total Utility
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Figure 51.3 Optimal Consumption Bundle
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Table 51.3 Sammy’s Marginal Utility per Dollar
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Figure 51.4 Marginal Utility per Dollar
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers