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
• How does our satisfaction change as we
consume greater quantities of a product?
Or, when should we stop?
• How do we choose how much of each
different product to consume?
• How do we find the optimal
consumption bundle?
Do Now
• Graph Sherry’s utility from berry consumption.
#1 in the worksheet.
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.
• Total utility: utility of total quantity consumed.
• Marginal utility – utility of the last item consumed.
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
Marginal vs. Total Utility
How does marginal
utility relate to total
utility?
How does it help us
make consumption
decisions?
Question
If you had two
consumption choices,
how would you decide
the amount of each
that you would
consume?
Let’s get real
• Consumption is limited by income – which is
scarce.
• The budget line: shows combinations of products
that we can afford assuming we spend all of our
income.
• These combinations are called consumption
bundles.
• The budget line shows consumption
possibilities.
Figure 51.2 The Budget Line
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Practice
Step 1
• Krugman, page 527, Problem #17
• Do A. Find the affordable consumption
bundles, and
• Graph.
Figure 51.3 Optimal Consumption Bundle
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Utility Race
Step 2
• If you graphed the total utility of each
bundle, which one would you pick?.
Spending the Marginal Dollar
• Marginal utility per dollar.
• MU= 10, cost = $5, MU / $1 = 2
• Optimal consumption rule: consumption is
optimal when the marginal utility per dollar of each
product is equal. [And we’ve spent all of our
money.]
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
Spending the Marginal Dollar
Problem #17 b
Also, solve for optimal bundle using zig zag
method.
Summary
Utility
• Total utility
• Maximized when MU = 0
• Budget constraint
Budget • Consumption possibilities
• Marginal utility per $
Optimal • Optimal consumption rule