Consumer Choice and
Utility Maximization
1
Thinking at the Margin
# Times
Watching Movie
1st
2nd
3rd
Total
Marginal
Utility
$30
$15
$5
$50
Price
$10
$10
$10
$30
Would you see the movie three times?
Notice that the total benefit is more than the
total cost but you would NOT watch the movie
the 3rd time.
Calculate Marginal Utility
# of Slices of
Pizza
0
1
2
Total Utility
(in utils)
0
8
14
3
4
5
6
7
8
19
23
25
26
26
24
Marginal
Utility/Benefit
How many pizzas would you buy if the price
per slice was $2?
3
Calculate Marginal Utility
# of Slices of
Pizza
0
1
2
3
Total Utility
(in dollars)
0
8
14
19
4
5
6
7
8
23
25
26
26
24
Marginal
Marginal Cost
Utility/Benefit
0
8
6
5
$2
$2
$2
$2
4
2
1
0
-2
$2
$2
$2
$2
$2
How many pizzas would you buy if the price
per slice was $2?
4
Calculate Marginal Utility
# of Slices of
Pizza
0
1
2
3
4
5
6
7
8
Total Utility
(in dollars)
0
8
14
19
Marginal
Marginal Cost
Utility/Benefit
0
8
6
5
2
2
2
2
0
-2
2
2
2
2
2
You will continue to
consume until
23
4
Marginal
Benefit
=
25
2
Marginal
Cost
26
1
26
24
How many pizzas would you buy if the price
per slice was $2?
5
CONSUMER BEHAVIOR
You plan to take a vacation and want to maximize
your utility. Based on the info below, which should
you choose?
Destination
Marginal Utility
(In Utils)
Price
Marginal Utility
Per Dollar
Tahiti
3000
$3,000
1 Util
Chicago
1000
$500
2 Utils
6
CONSUMER BEHAVIOR
You plan to take a vacation and want to maximize
your utility. Based on the info below, which should
you choose?
Destination
Marginal Utility
(In Utils)
Price
Marginal Utility
Per Dollar
Tahiti
3000
$3,000
1 Util
Chicago
1000
$500
2 Utils
Calculating Marginal Utility Per Dollar allows
you to compare products with different prices.
7
$10
Utility Maximization
# Times
Going
Marginal
Utility
(Movies)
1st
2nd
3rd
4th
30
10
8
5
MU/P
(Price =$10)
Marginal
Utility
(Go Carts)
$5
MU/P
(Price =$5)
10
4
2
1
If you only have $25, what combination of
movies and go carts maximizes your utility?
$10
Utility Maximization
# Times
Going
Marginal
Utility
(Movies)
1st
2nd
3rd
4th
30
10
8
5
$5
(Price =$10)
Marginal
Utility
(Go Carts)
(Price =$5)
3
$2
$1
$.50
10
4
2
1
$2
$1
$.40
$.20
MU/P
MU/P
If you only have $25, what combination of
movies and go carts maximizes your utility?
$10
Utility Maximization
# Times
Going
Marginal
Utility
(Movies)
1st
2nd
3rd
4th
30
10
8
5
$5
(Price =$10)
Marginal
Utility
(Go Carts)
(Price =$5)
3
$2
$1
$.50
10
4
2
1
2
$1
$.40
$.20
MU/P
MU/P
If you only have $25, what combination of
movies and go carts maximizes your utility?
$10
Utility Maximization
# Times
Going
Marginal
Utility
(Movies)
1st
2nd
3rd
4th
30
10
8
5
$5
(Price =$10)
Marginal
Utility
(Go Carts)
(Price =$5)
3
1
.80
.50
10
4
2
1
2
.80
.40
.20
MU/P
MU/P
If you only have $25, what combination of
movies and go carts maximizes your utility?
Utility Maximizing Rule
The consumer’s money should be spent so that the
marginal utility per dollar of each goods equal each
other.
MUx = MUy
Px
Py
The utility maximizing rule assumes that you always
consume where MU/P for each product is equal
12
Example of Voluntary Exchange
Ex: You want to buy a truck so you go to the local
dealership. You are willing to spend up to $20,000 for a
new 4x4. The seller is willing to sell this truck for no less
than $15,000. After some negotiation you buy the truck
for $18,000.
Analysis:
Buyer’ Maximum- $20,000
Sellers Minimum- $15,000
Price- $18,000
Consumer’s Surplus-$2,000
Producer’s Surplus- $3,000
13
Voluntary Exchange Terms
Consumer Surplus is the difference
between what you are willing to pay
and what you actually pay.
CS = Buyer’s Maximum – Price
Producer’s Surplus is the difference
between the price the seller received
and how much they were willing to sell
it for.
PS = Price – Seller’s Minimum
14
Consumer and Producer’s Surplus
P
$10
Calculate the area of:
1. Consumer Surplus
2. Producer Surplus
3. Total Surplus
S
8
6
$5
4
CS
PS
1. CS= $25
2. PS= $20
3. Total= $45
2
1
D
2 4 6 8 10
Q
15