Consumer
Choice and
Demand
CHAPTER OUTLINE
Chapter
11
I. Calculate and graph a budget line that shows the limits to a person’s
consumption possibilities.
A. The Budget Line
B. A Changes in the Budget
C. Changes in Prices
1. A Fall in the Price of Water
2. A Rise in the Price of Water
D. Prices and the Slope of the Budget Line
2. Explain marginal utility theory and use it to derive a consumer’s demand
curve.
A. Utility
1. Temperature: An Analogy
B. Total Utility
C. Marginal Utility
D. Maximizing Total Utility
1. Allocate the Available Budget
2. Equalize the Marginal Utility Per Dollar Spent
E. Finding An Individual Demand Curve
F. The Power of Marginal Analysis
G. Units of Utility
3. Use marginal utility theory to explain the paradox of value: Why water is
vital but cheap while diamonds are relatively useless but expensive.
A. Consumer Efficiency
B. The Paradox of Value
1. Consumer Surplus
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Part 4 . A CLOSER LOOK AT DECISION MAKERS
 What’s New in this Edition?
Chapter 11 uses a see-saw analogy to give a more intuitive
explanation of why equalizing the marginal utility per dollar
maximizes total utility. The material that related elasticity to
marginal utility is deleted.
 Where We Are
In this chapter, we uncover the consumer’s behavior that
leads to a downward-sloping demand curve. The consumer
maximizes utility by allocating his or her entire budget while
equating the marginal utility per dollar spent across all
goods. As a result, the demand curve reflects choices a consumer is willing to make that maximize his or her utility.
The chapter concludes by investigating the paradox of value.
 Where We’ve Been
The first three sections of the book focused heavily on demand and supply. The demand and supply model was developed and then extended to discuss efficiency, externalities, public goods, common resources, and government policies such as price ceilings, price floors, and taxes.
 Where We’re Going
After this chapter, the focus turns to exploring the supply
curve in greater detail. Chapter 12 looks at a firm’s production choices and its total product function. After examining
the firm’s production, we examine its costs and its cost
curves in the short run and in the long run.
IN THE CLASSROOM
 Class Time Needed
You can complete this chapter in two to two and a half class sessions, depending
the mathematical level of your class.
An estimate of the time per checkpoint is:

11.1 Consumption Possibilities—25 to 35 minutes

11.2 Marginal Utility Theory—50 to 80 minutes

11.3 Efficiency, Price, and Value—15 to 20 minutes
Chapter 11 . Consumer Choice and Demand
269
CHAPTER LECTURE
11.1
Consumption Possibilities
The Budget Line

Households have limited budgets,
which means they must choose between
affordable combinations of goods and
services. A budget line, illustrated in
the figure, shows the limits to a household’s consumption choices. The
household can buy any combination of
sodas and movies that lies on or within
the budget line.
A Change in the Budget

When the person’s budget changes, the
budget line shifts and its slope does not
change. If the budget increases, the
budget line shifts outward; if the budget
decreases, the budget line shifts inward.
A Change in Prices

When the price of the good measured along the horizontal axis (movies) changes, the
budget line rotates around the vertical intercept. If the price of the good falls, the budget
line rotates outward and becomes steeper; if the price of the good rises, the budget line
rotates inward and becomes steeper.

When the price of the good measured along the vertical axis (sodas) changes, the budget
line rotates around the horizontal intercept. If the price of the good falls, the budget line
rotates outward and becomes less steep; if the price of the good rises, the budget line rotates inward and becomes less steep.

A relative price is the price of one good divided by the price of another good. The magnitude of the slope of the budget line is the relative price of the good on the horizontal
axis in terms of the good on the vertical axis, or in the diagram, the relative price of a
movie in terms of sodas. A relative price is an opportunity cost, so the relative price of a
movie in terms of sodas gives the opportunity cost of a movie in terms of sodas forgone
Part 4 . A CLOSER LOOK AT DECISION MAKERS
270
11.2
Marginal Utility Theory
Utility



The benefit or satisfaction that a person gets from the consumption of a good or service is
called utility.
Total utility is the total benefit that a person gets
Quantity
Total
Marginal
from the consumption of goods and services. As
of movies
utility
utility
more of a good or service is consumed, total utility
0
0
increases. Marginal utility is the change in total utili24
ty that results from a one-unit increase in the quanti1
24
ty of a good consumed. Diminishing marginal utili20
ty is the principle that as more of a good or service is
2
44
consumed, its marginal utility decreases.
16
The table to the right has the total utility and mar3
60
ginal utility from an individual’s consumption of
12
movies in a week.
4
72
Maximizing Total Utility
A consumer’s choices influence the total level of his or her utility by because the choice determines the combination of goods that are consumed. Some combinations will generate more utility than others. The key assumption of marginal utility theory is that the household consumes the
combination that maximizes its utility.
 The utility-maximizing rule has two steps:
 Allocate the entire available budget
 Make the marginal utility per dollar equal for all goods. The marginal utility per
dollar is the marginal utility from a good relative to the price paid for the good,
which is the marginal utility from a good divided by its price.
 This rule maximizes utility because anytime the marginal utility per dollar spent on one
good exceeds that of another good, the consumer can increase his or her total utility by
spending a dollar less on the good with the lower marginal utility per dollar spent and
spending the dollar on the good with the higher marginal utility per dollar spent.
 The table to the right has the marginal utiliQuantity
Marginal
Quantity
Marginal
ty schedules that are computed from the toof movutility
of books
utility
tal utility schedules in the table above. The
ies
price of a movie is $8, the price of a paper
1
24
1
20
2
20
2
10
back book is $4, and the consumer has $24
3
18
3
8
to allocate between movies and books. To
4
8
4
6
maximize utility, the individual buys 2
5
4
5
4
movies and 2 books because that combina6
2
6
2
tion of movies and books spends all the
available income and sets the marginal utility per dollar spent of movies equal to that of
books. (Both equal 2.50.).
Chapter 11 . Consumer Choice and Demand
271
To show that maximizing total utility requires equalizing the marginal utility per dollar spent on
each good, work with the case when they are not equal. Suppose the marginal utility per dollar
spent on a movie is 20 and the marginal utility per dollar spent on a soda is 10. Ask “If you
gained an additional dollar, what would you spend it on and how much would your total utility
increase?” The students will spend it on movies and their total utility will rise by 20. Now ask “If
you lost a dollar, what you cut back on and how much would your total utility decrease?” The
students will cut back on sodas and their total utility will fall by 10. Now tell them that they can
gain a dollar by cutting back a dollar on sodas. Ask them the net change in their total utility,
which is +10. The point to make is that anytime the marginal utility per dollar spent on one good
differs from that of another good, the students can rearrange their consumption by cutting back
on the good with the low marginal utility per dollar spent and spending the dollar on the good
with the high marginal utility per dollar spent and increase their total utility.
Finding an Individual Demand Curve



If the price of a good falls and other things remain the same, the marginal utility per dollar spent on that good rises. As a result, the consumer increases his or her purchases of
that good in order to maximize utility. (As more of the good is purchased, its marginal
utility decreases; as less of other goods are purchased, their marginal utilities increase.
Eventually the consumer reaches a new equilibrium at which the marginal utility per
dollar spent on all the goods are equal.)
When the price of a good falls, the consumer substitutes the now lower priced good for
the other good. So, when the price of a good falls, the consumer increases the quantity
demanded, which is the law of demand.
When the price of a good rises, the consumer substitutes away from the now higher
priced good for the other good. So, when the price of a good rises, the consumer decreases the quantity demanded, which is the law of demand.
11.3
Efficiency, Price, and Value
Consumer Efficiency

The demand curve is a consumer’s marginal benefit curve. Because the demand curve is
derived by maximizing utility, marginal benefit is the maximum price a consumer is willing to pay for an extra unit of a good or service when utility is maximized.
Paradox of Value


The paradox of value is that water, which is essential to life, costs little, but diamonds,
which are useless in comparison to water, are expensive.
The resolution to this paradox comes from distinguishing total utility and marginal utility. The total utility from water is much more than from diamonds. But we have so much
water that its marginal utility is small. And we have so few diamonds that their marginal
utility is high. When a household maximizes its utility, it makes the marginal utility per
dollar spent equal for all goods. Because diamonds have a high marginal utility, they
have a high price. Because water has a low marginal utility, it has a low price.
 The consumer surplus from water exceeds the consumer surplus from diamonds.
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 Lecture Launchers
1.
Use the paradox of value to start your lecture. Ask students how much they
are willing to pay for a gallon of water. Of course, they’ll answer a relatively low amount. Then ask them how much they would be willing to pay for
a diamond. Most students will answer hundreds or thousands of dollars.
Then ask them “Why?” Remind them that water is essential for life and that
it makes no sense to be willing to spend so little for such a valuable item.
Spark some more discussion by asking them their willingness to pay for
water versus their willingness to pay for diamonds if they were lost in the
desert. When you finish the day’s lecture, ask students if they can explain
the paradox. Reassure them this topic is difficult to understand. In fact, so
difficult that until the concepts of utility and marginal utility were discovered in the 1800s, the paradox could not be explained.
2.
A major component of consumer demand is preferences, which vary between consumers. A good starting place might be to have the students
name some things they had bought recently and explain why they did so.
Then find someone else who would not have made the same purchase, and
explain why. Often we see that someone else has bought something we regard as silly or useless, and mentally question it thinking “isn’t it strange
what some people would rather have than money.” That the item was purchased at all is evidence that at least at the time of purchase, the good or
service was more desirable than money
3.
Once you have introduced the idea of marginal utility, ask your students
why a vending machine, which requires payment for each snack purchased,
is used to sell snacks while a newspaper can be sold out of a box that allows
anyone to take more than one paper. If students fail to respond using marginal utility analysis, prompt them by asking, “If snacks were sold using a
newspaper style box, would some people take more than they paid for?”
Then ask, “Why don’t people take more than one paper?” See if the students can discover diminishing marginal utility on their own. If not, explain
why different sales techniques are used: Because the marginal utility of a
paper diminishes so rapidly, there is little concern that people take more
than one. When you have formally taught diminishing marginal utility, tie
your lecture back into this example.
 Land Mines
1.
Students are introduced to another curve in this chapter, the budget line.
Remind them that this line is not a demand curve nor a production possibilities frontier. Point out the differences: A demand curve is graphed in
price/quantity space and shows how the quantity demanded of a product
depends on its price; a budget line is graphed in good A/good B space and
Chapter 11 . Consumer Choice and Demand
shows combinations that can be afforded; and although a PPF is also
graphed in good A/good B space, it applies to a nation as whole and shows
what can be produced. However, the budget line is similar to the PPF because both show limits.
2.
To help students remember how the budget line shifts when the prices of
goods change, suggest they should assume they spend ALL of their income
on either good. For example, suppose apples are on the x-axis, and oranges
are on the y-axis. Ask students, “What happens if the price of apples increases?” Tell them to assume that they hate apples and regardless of the
price of apples, they spend their entire budget on oranges. Because the
price of oranges doesn’t change, ask how the change in the price of apples
impacts the number of oranges they can buy. Point out the y-intercept and
stress the fact that this is the consumption point at which all their budget is
spent on oranges. Make it clear that this point does not change when the
price of apples rises. Then turn to the x-axis and tell students that they now
buy only apples and no oranges. Discuss with them that the x-intercept
shows the maximum number of apples they can buy when they spend all
their budget on apples. While pointing out the x-intercept, ask students
what happens to the number of apples they can buy when the price of apples rises. When they answer “fewer apples,” move your finger leftward
along the x-axis and make a mark. Then draw the new budget line: the yintercept does not change while the x-intercept rotates inward, making the
budget line steeper. The point of this exercise is to focus on the intercepts
and not the slope. For many students, this is an easier method of determining the change in the budget line. To complete the exercise, let the price of
oranges fall and go through the same mechanics.
3.
Students often struggle with the concept of marginality. A brief and very
sloppy use of Betham’s utility calculus might solve the problem while getting the basic concept across. One sweater gives me 25 utils of bliss, while
the second is worth only 23 utils, and so on, until a point come when one
more sweater will provoke negative utility as not only have I run out of
room in my closet but I’ve just been buried in a wooly avalanche!
4.
When you use the marginal utility per dollar approach to explain utility
maximization, you should be prepared for students’ questioning the reality
of the idea that they actually equate marginal utility per dollar before making a consumption decision. Some will say, “I’ve never calculated the marginal utility of any item I’ve ever purchased. This material doesn’t make
any sense.” You should agree with your students that people don’t calculate
and compare marginal utilities and prices but point out to them that the
goal is to predict choices, not to describe the thought processes that make
them. Indeed, one of the challenges in teaching the marginal utility theory
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Part 4 . A CLOSER LOOK AT DECISION MAKERS
is getting the students to appreciate the fundamental role of a model of
choice. Gary Becker had a pertinent story you can use:
Orel Hershiser [substitute a current pitcher] is a top baseball player. He effectively knows all the laws of motion, of eye
and hand coordination, about the speed of the bat and ball, and
so on. He’s in fact solving a complicated physics problem when
he steps up to pitch, but obviously he doesn’t have to know
physics to do that. Likewise, when people solve economic problems rationally they’re really not thinking that well, I have this
budget and I read this textbook and I look at my marginal utility.
They don’t do that, but it doesn’t mean they’re not being rational
any more than Orel Hershiser is Albert Einstein.
5.
Students usually grasp the consumer must assess the marginal utility lost
against the marginal utility gained as one good is substituted for another.
Yet, students usually haven’t thought about how much of one good is available from forgoing some quantity of the other good. Point out that this is
not known until the relative prices of the two goods are known, which is
why the marginal utility is weighted by its price.
Chapter 11 . Consumer Choice and Demand
ANSWERS TO CHECKPOINT EXERCISES
 CHECKPOINT 11.1 Consumption Possibilities
1a. The affordable combinations of burgers and salad, all of which spend the
$36 in Jenny’s budget, are:
0 burgers and 18 salads
2 burgers and 15 salads
4 burgers and 12 salads
6 burgers and 9 salads
8 burgersand 6 salads
10 burgers and 3 salads
12 burgers and 0 salads
1b. Figure 11.1 shows Jenny’s budget line.
1c. If the price of a burger falls, the budget line rotates outward and becomes flatter. The vertical
intercept stays the same (18 salads) and the
horizontal intercept increases.
If Jenny’s burger and salad budget decreases,
the budget line shifts inward and its slope
does not change.
1d. The relative price of a salad is the opportunity
cost of a salad—the number of burgers that
Jenny must forgo to get 1 salad. The relative
price of a salad equals the price of a salad divided by the price of a burger, which is $2 a
salad  $3 a burger = 2/3 of a burger for a salad. If the price of a burger falls to $1.50, the
relative price of a salad increases to $2 a salad
 $1.50 a burger, which is 1 1/3 of a burger per
salad.
 CHECKPOINT 11.2 Marginal Utility Theory
1a. The total utility of the third dish of pasta is 168 units of utility and the total
utility of the second dish of pasta is 120 units of utility. The change in total
utility equals the marginal utility, so the marginal utility is (168 units of
utility)  (120 units of utility) = 48 units of utility.
1b. The marginal utility per dollar spent on pasta when Wanda has 3 dishes of
pasta a week is 48 units of utility  $4 = 12 units of utility per dollar spent
on the 3rd dish of pasta.
1c. The total utility of the fourth can of juice is 60 units of utility and the total
utility of the third can of juice is 54 units of utility. The change in total utili-
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Part 4 . A CLOSER LOOK AT DECISION MAKERS
ty equals the marginal utility, so the marginal utility is (60 units of utility) 
(54 units of utility) = 6 units of utility.
1d. The total utility of the second can of juice is 40 units of utility and the total
utility of the first can of juice is 22 units of utility. The change in total utility
equals the marginal utility, so the marginal utility is (40 units of utility) 
(22 units of utility) = 18 units of utility. So, the marginal utility per dollar
spent on the second can of juice a week is 18 units of utility  $1 = 18 units
of utility per dollar spent on the second can of juice.
1e. Wanda is not maximizing her utility. She is not allocating all of her budget
because she is spending only $10. And the marginal utility per dollar spent
on juice is 18 units of utility per dollar spent, which does not equal the marginal utility per dollar spent on pasta, which is 14 units of utility per dollar
spent. To maximize her utility, Wanda should buy 1 more can of juice. If
she buys 1 more can of juice, she consumes 3 cans of juice and 2 dishes of
pasta. This combination allocates all of her budget and sets the marginal
utility per dollar spent on juice equal to the marginal utility per dollar spent
on pasta, which is 14 units of utility per dollar spent.
 CHECKPOINT 11.3 Efficiency, Price, and Value
1.
On the margin, the economics book is more valuable. The marginal utility
from the economics book exceeds the marginal utility from another gallon
of water. But, the total utility from the economics book is much less than the
total utility from water. Even an economist can live without an economics
book but not even an economist can live without water!
Chapter 11 . Consumer Choice and Demand
277
ANSWERS TO CHAPTER CHECKPOINT EXERCISES
1a. The table shows Amy’s consumption possibilities.
Coffee
(cups per week)
6
5
4
3
2
1
0
Soda
(cans per week)
0
2
4
6
8
10
12
1b. Figure 11.2 shows Amy’s consumption possibilities, which are her budget line.
1c. Amy can afford to buy 7 cans of soda and 2
cups of coffee.
1d. Amy cannot afford to buy 7 cups of coffee and
2 cans of soda.
1e. The relative price of a cup of coffee is the
number of cans of soda that Amy must forgo
to get 1 cup of coffee. The relative price of a
cup of coffee equals the price of a cup of coffee
divided by the price of a can of soda, which is
$2 a cup of coffee  $1 per a of soda = 2 cans of
soda per cup of coffee.
1f. The relative price of a can of soda is the number of cups of coffee that Amy must forgo to
get 1 can of soda. The relative price of a can of
soda equals the price of a can of soda divided
by the price of a cup of coffee, which is $1 a can of soda  $2 a cup of coffee
= 1/2 of a cup of coffee per can of soda.
2a. The table shows Amy’s new consumption possibilities.
Coffee
(cups per week)
4
3
2
1
0
Soda
(cans per week)
0
3
6
9
12
278
2b.
2c.
2d.
2e.
3a.
3b.
3c.
Part 4 . A CLOSER LOOK AT DECISION MAKERS
Figure 11.3 shows Amy’s old budget line,
which is her old consumption possibilities,
and her new budget line, which is her new
consumption possibilities.
If Amy buys 6 cans of soda, she can buy 2
cups of coffee.
The relative price of a cup of coffee is the
number of cans of soda that Amy must forgo to get 1 cup of coffee. The relative price
of a cup of coffee equals the price of a cup of
coffee divided by the price of a can of soda,
which is $3 a cup of coffee  $1 a can of soda
= 3 cans of soda per cup of coffee. The relative price of a cup of coffee has increased
The relative price of a can of soda has decreased. The relative price of a can of soda is
the number of cups of coffee that Amy must
forgo to get 1 can of soda. The relative price of a can of soda equals the
price of a can of soda divided by the price of a cup of coffee, which is $1 a
can of soda  $3 a cup of coffee = 1/3 of a cup of coffee per can of soda.
The table shows the missing numOrange juice
bers. The missing number are under(cartons
Total utility
lined.
per day)
The number of cartons of orange
0
0
juice Ben buys depends on his budg1
7
et, the price of orange juice, the prices
of the other goods and services Ben
2
12
buys, and Ben’s marginal utility from
3
15
these other goods and services. Ben
will buy the quantity of orange juice
4
17
that sets the marginal utility per dollar spent from orange juice equal to
5
18
the marginal utility per dollar spent
from the other goods and services. So Ben buys the quantity of orange
juice such that the marginal utility per dollar spent from the last carton of
orange juice equals the marginal utility per dollar spent from the other
goods and services Ben buys.
Ben would buy no orange juice if the marginal utility per dollar spent
from the first carton of orange juice is less than the marginal utility per
dollar from the other goods and services Ben buys.
Marginal
utility
7
5
3
2
1
Chapter 11 . Consumer Choice and Demand
3d.
3e.
4a.
4b.
4c.
The principle of diminishing marginal utility applies to Ben’s consumption of orange juice because as the quantity of orange juice Ben consumes
increases, his marginal utility from orange juice diminishes.
Ben will have more cartons of orange juice at the “all-you-can-eat” breakfast than if he had to pay for each carton individually. At the “all-youcan-eat” breakfast the price of an individual carton of orange juice is zero.
So Ben will maximize his utility by drinking orange juice until its marginal utility is zero.
The figures are above. Look at Figure 11.5 on page 275 in the text and
Figure 11.5 above. The graphs show that the marginal utility from gum
decreases more rapidly than does the marginal utility from bottled water.
If Tina is maximizing her utility, the marginal utility per dollar spent on
gum equals the marginal utility per spent on bottled water. The marginal
utility from the fourth pack of gum is 6, so the marginal utility per dollar
spent on gum is 6  25¢, which is 24. The marginal utility from the fourth
bottle of water is 6, so the marginal utility per dollar spent on bottled water is 6  50¢, which is 12. The marginal utility per dollar spent on gum
does not equal the marginal utility per dollar spent on bottled water, so
Tina is not maximizing her utility.
The marginal utility per dollar spent on gum exceeds the marginal utility
per dollar spent on bottled water, so Tina can increase her total utility by
consuming more gum and less bottled water. In this case, the utility Tina
gains when she spends another dollar on gum exceeds the utility she loses when she spends a dollar less on water.
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Part 4 . A CLOSER LOOK AT DECISION MAKERS
5.
If Tina’s budget increases, she’ll consume more water and gum because
they are both normal goods. Between the two, she will consume relatively
more water because its marginal utility does not decrease as rapidly as
gum’s marginal utility.
6.
If Tina’s budget increases and the price of bottled water rises, Tina consumes more gum. The impact on Tina’s consumption of water is ambiguous. The increase in the budget implies more bottled water will be consumed, but this increase can be offset by the increase in the price of bottled water.
7a.
The total utility from consuming 3 cakes and 2 dishes of pasta is 61 units
of utility.
The marginal utility from the third cake is 7 units of utility.
The marginal utility per dollar spent on the third cake is (7  $4), which is
1 3/4 units of utility per dollar spent.
The marginal utility from the second dish of pasta is 16 units of utility.
The marginal utility per dollar spent on the second dish of pasta is
(16  $8), which is 2 units of utility per dollar spent.
Martha is maximizing her utility because she is allocating her entire
budget and the marginal utility per dollar spent on cake (2 units of utility
per dollar spent) equals the marginal utility per dollar spent on pasta (2
units of utility per dollar spent).
7b.
7c.
7d.
7e.
7f.
8a.
8b.
8c.
8d.
If the price of a dish of pasta falls to $4, Martha buys 2 cakes and 4 dishes
of pasta. This combination maximizes Martha’s utility because it allocates
her entire income and equates her marginal utility per dollar spent for
both goods.
When the price of a dish of pasta is $8 (and the price of a cake is $4), Martha buys 2 dishes of pasta. So, one point is a price of $8 for a dish of pasta
and a quantity of 2 dishes. When the price of a dish of pasta is $4 (and the
price of a cake is $4), Martha buys 4 dishes of pasta. So, another point is a
price of $4 for a dish of pasta and a quantity of 4 dishes.
Martha’s demand for pasta is unit elastic over the price range between $8
and $4 because her total expenditure on pasta does not change when the
price falls.
When the price of a cake is $4, the price of a dish of pasta is $8, and Martha has $40 to spend, she will buy 4 cakes and 3 dishes of pasta. This
combination maximizes Martha’s utility because it allocates (spends) her
entire budget and equates the marginal utility per dollar spent on cake to
the marginal utility per dollar spent on pasta, with both equal to 1 1/2
units of utility per dollar.
Chapter 11 . Consumer Choice and Demand
9a.
The relative price of a movie ticket is the number of pizzas that Tim must
forgo to buy 1 movie ticket. The relative price of a movie ticket equals the
price of a movie ticket divided by the price of a pizza, which is $8 a movie
ticket  $4 a pizza = 2 pizzas per movie ticket.
9bi.
Tim’s consumption possibilities increase because his budget line rotates
outward.
9bii. Tim changes his purchases to equate the marginal utility per dollar spent
on each good.
9biii. Most likely, Tim will increase the quantity of pizza he consumes.
10a.
10b.
11a.
11b.
11c.
Because the price of a sandwich is 2 1/2 times greater than the price of a
coffee and Josie is maximizing utility, the marginal utility from the last
sandwich must be 2 1/2 times greater than the marginal utility from the
last coffee. When the marginal utility of the sandwich is 2 1/2 times larger
than the marginal utility of the coffee, Josie is equating the marginal utility per dollar spent for coffee and sandwiches.
Josie’s allocation is efficient because she maximizes her utility. By maximizing her utility, she is making the best use of her scarce resources, that is,
her income.
Adrienne gets greater marginal utility from her apartment. The price of
her apartment is 2 times greater than the price of the horse stable, so for
Adrienne to maximize her utility, her marginal utility from her apartment
must be 2 times her marginal utility from the horse.
Adrienne thinks so highly of her horse stable, she receives greater total
utility from her horse.
As is the case for the water and diamond paradox of value, Adrienne receives greater total utility from the less expensive good.
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 Critical Thinking
12a.
12b.
12c.
12d.
13a.
13b.
13c.
Students who buy a meal plan do so because they plan to eat most of
their meals on campus, where the plan covers them. Students who do not
buy a meal plan, plan to eat most of their meals where the plan does not
cover them. Both types of student buy their meals such that their marginal utility per dollar spent on meals equals the marginal utility per dollar
spent on other goods and services.
The student without the meal plan pays more for lunch. So this student’s
marginal utility is higher than the student’s marginal utility who has the
meal plan. To make the marginal utility per dollar spent equal for all
goods, the student without the meal plan buys fewer lunches.
The student who does not have a meal plan pays more for each lunch as it
is consumed. Because the price of a lunch is higher for someone without a
meal plan, the marginal utility for each lunch is higher for someone without a meal plan.
The higher price of a lunch with an unchanged price for a meal plan increases the number of people who buy meal plans. The price of a lunch
increases for those people who do not buy meal plans. For these students,
the higher price of a lunch decreases the marginal utility per dollar spent
on lunches. To maximize their utility, because the marginal utility per
dollar spent on lunch is less, students without a meal plan buy fewer
lunches. Students with a meal plan do not change their demand.
When the ticket price of riding public transportation is zero, the marginal
utility per dollar spent riding public transportation increases. So, to maximize their utility, more people ride public transportation.
Even with a ticket price of zero, riding public transportation was not
“free” because public transportation is generally less convenient than private transportation. So the opportunity cost of riding public transportation is not zero. This opportunity cost must be added to the ticket price of
riding public transportation to get the total price of riding public transportation. So, even when the ticket price is zero, the marginal utility per
dollar spent of riding public transportation was still to low to entice some
people to ride.
The free-ride day showed some people that the opportunity cost of riding
public transportation is less than they thought. So these people realize
that the price of riding public transportation, which includes the ticket
price as well as the other opportunity costs, is less than they believed. As
a result, some of these people will continue to ride public transportation
even after the ticket price is no longer zero. So marginal utility theory
predicts that there is a small increase in the demand for public transportation after the free-ride day.
Chapter 11 . Consumer Choice and Demand
14.
The marginal utility of additional food decreases rapidly as more food is
consumed. However, the marginal utility of additional automobiles
(more precisely, the attributes of an automobile such as horsepower, comfort, safety, and so forth) decreases slowly as more attributes are consumed. When people’s incomes increase, they buy more of all normal
goods. For food, only a little additional food need be consumed until the
marginal utility per dollar spent on food equals the marginal utility per
dollar spent on other goods and services. But for automobiles, significantly more attributes of automobiles must be consumed to drive the marginal utility per dollar spent on an automobile to equality with the marginal
utility per dollar spent on other goods and services.
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 Web Exercises
15a.
15b.
15c.
16a.
16b.
16c.
17.
There are a variety of ticket options. In general, the consumer wants to
spend the minimum amount for a ride because that increases the consumer’s consumption possibilities. So, for instance, a one-way fare token
is the least expensive if the consumer takes only a few rides a month and
fewer than 3 rides on any given day. This pass makes the consumer’s
rides as inexpensive as possible and so makes the consumer’s consumption possibilities as large as possible. But, if the consumer takes 3 or more
rides a day for 5 or more days a week, a weekly pass minimizes the cost
of a ride and maximizes the consumption possibilities. Similarly, a
monthly pass is best if the consumer rides more frequently.
The person wants to maximize his or her consumption possibilities by
paying the least per ride. The decision whether to buy a day pass or a
pass for a longer period of time depends on how many days the person
rides. If the person rides for 5 or more days per week, a weekly pass has a
lower per-ride price than a day pass, so the marginal utility per dollar
spent on rides is greater buying a weekly pass.
If the price of a single trip fell and the price of a day pass increased, the
number of riders would decrease. After a person has purchased a day
pass, all rides that day have a price of zero. So the person takes a ride
even if the marginal utility from the ride is low because the price of the
additional ride is zero. Lowering the price of a single trip and raising the
price of a day price makes people less likely to buy a day pass and so decreases the number of riders.
The students’ answers depend on their preferences and so probably are
different for each student.
The students buy the quantity of goods for which the marginal utility per
dollar spent is equal for all goods. Because the prices are same for each
student, differences in what they buy are the result of differences in the
marginal utility among the students.
If the voucher had doubled to $1,000 and the prices also had doubled,
there would be no difference in what the students purchased. The budget
line is unaffected if both the budget and prices change by the same proportion, so the students’ consumption possibilities do not change. The
marginal utilities also do not change, so the students’ purchases do not
change.
It is likely that the student would buy the iPod from the store with the
lowest price, though the student might be willing to pay a bit more to buy
from a “name brand” store. By purchasing from the lowest priced store,
the student is maximizing his or her utility because this procedure max-
Chapter 11 . Consumer Choice and Demand
285
imizes the student’s consumption possibilities, that is, makes the budget
line lie as far to the right as possible.
ADDITIONAL EXERCISES FOR ASSIGNMENT
 Questions
 CHECKPOINT 11.1 Consumption Possibilities
1. Martha's cake and pasta budget is $24 a week. The price of a cake is $4, and
the price of a dish of pasta is $6.
1a. List the combinations of cake and pasta that are on Martha’s budget line.
1b. Draw a graph of Martha's budget line with pasta plotted on the x-axis.
1c. If the price of a dish of pasta is halved, what is the change in the relative
price of a cake? Explain your answer.
1d. Describe how Martha's budget line in (b) changes if the following events
occur one at a time and other things remain the same:
The price of a dish of pasta falls.
The price of a cake falls.
Martha's cake and pasta budget decreases.
2.
The price of a bag of popcorn is $2, the price of a can of soda is $1, and
Bobby’s budget for popcorn and soda is $10.
2a. List the affordable combinations of cans of soda and bags of popcorn that
are on Bobby’s budget line.
2b. What is the relative price of a bag of popcorn?
2c. Suppose Bobby’s budget increases to $12 but the prices of a bag of popcorn
and a can of soda do not change. What happens to the relative price of a
bag of popcorn?
 CHECKPOINT 11.2 Marginal Utility Theory
3. The table shows Wendy's total utility
Tacos
from tacos and movies. The price of a
Quantity
Total
(per week)
utility
taco is $2, the price of a movie is $8, and
0
0
Wendy has $22 a week to spend on
1
11
tacos and movies.
2
20
3a. Calculate Wendy's marginal utility from
3
27
the third movie in the week.
4
30
3b. Calculate the marginal utility per dollar
5
31
6
31
spent on movies when Wendy sees 3
movies a week.
3c. Calculate Wendy's marginal utility from the fourth taco in the week.
Movies
Quantity
Total
(per week)
utility
0
0
1
32
2
60
3
84
4
104
5
120
6
132
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Part 4 . A CLOSER LOOK AT DECISION MAKERS
3d. Calculate the marginal utility per dollar spent on tacos when Wendy buys 4
tacos a week.
3e. If Wendy sees 2 movies and buys 2 tacos a week, is she maximizing total
utility? Explain your answer. If Wendy is not maximizing total utility,
explain how she would adjust her consumption choice to do so.
4.
The table has Bobby’s total utility from
popcorn and soda. Assume the price of
a bag of popcorn is $2, the price of a can
of soda is $1, and Bobby’s budget is $10.
What is the Bobby’s utility maximizing
combination of cans of soda and bags of
popcorn ?
Popcorn
Bags
Total
(per week)
utility
0
0
1
40
2
60
3
70
4
75
5
77
Soda
Cans
Total
(per week)
utility
0
0
1
30
2
50
3
65
4
70
5
73
 Answers
 CHECKPOINT 11.1 Consumption Possibilities
1a. The combinations of cake and pasta that are on Martha’s budget line are:
0 cake and 4 dishes of pastas
3 cakes and 2 dishes of pastas
6 cakes and 0 dishes of pasta
1b. Figure 11.6 shows Martha’s budget line.
1c. The relative price of a cake is the number of
dishes of pasta that Martha must forgo to get
1 cake. The relative price of a cake equals the
price of a cake divided by the price of a dish
of pasta. At the initial prices, the relative price
is $4 a cake  $6 a dish of pasta, which is 2/3 of
a dish of pasta per cake. When the price of a
dish of pasta falls to $3, the relative price of a
cake is $4 a cake  $3 a dish of pasta, which is
1 1/3 of a dish of pasta per cake. Then fall in
the price of a dish of pasta raises the relative
price of a cake.
1d. If the price of a dish of pasta falls, the budget
line rotates outward and becomes flatter. The
vertical intercept stays the same, while the
horizontal intercept increases.
If the price of a cake falls, the budget line rotates outward and becomes
steeper. The horizontal intercept stays the same, while the vertical intercept
increases.
Chapter 11 . Consumer Choice and Demand
If Martha’s budget decreases, the new budget line shifts inward and is parallel to the old budget line.
2a. The affordable combinations are 0 bags of popcorn and 10 cans of soda; 1
bag of popcorn and 8 cans of soda; 2 bags of popcorns and 6 cans of soda; 3
bags of popcorns and 4 cans of soda; 4 bags of popcorns and 2 cans of soda;
and 5 bags of popcorns and 0 cans of soda.
2b. The relative price of a bag of popcorn is the number of cans of soda that
Bobby must forgo to get 1 bag of popcorn. The relative price of a bag of
popcorn equals the price of a bag of popcorn divided by the price of a can
of soda, which is $2 a bag of popcorn  $1 a can of soda = 2 cans of soda per
bag of popcorn.
2c. Because neither the price of a bag of popcorn nor a can of soda changes, the
relative price of a bag of popcorn does not change. A change in a person’s
budget does not change relative prices.
 CHECKPOINT 11.2 Marginal Utility Theory
3a. The total utility of 3 movies is 84 units of utility and the total utility of the 2
movies is 60 units of utility. The change in total utility, which equals the
marginal utility, is (84 units of utility)  (60 units of utility equals 24 units of
utility.
3b. The marginal utility per dollar spent on movies when Wendy sees 3 movies
is 24  $8 = 3 units of utility per dollar spent.
3c. The total utility of the 4 tacos is 30 units of utility and the total utility of the
3 tacos is 27 units of utility. The marginal utility of the 4th taco equals (30
units of utility)  (27 units of utility), which is 3 units of utility.
3d. The marginal utility per dollar spent on the 4th taco is 3 units of utility  $2
a taco, which is 1 1/2 units of utility per dollar spent.
3e. Wendy is not maximizing her utility. She is not allocating all of her budget
because she is spending only $20. And the marginal utility per dollar spent
on tacos is 4 1/2 units of utility per dollar spent, which does not equal the
marginal utility per dollar spent on movies, which is 3 1/2 units of utility
per dollar spent. To maximize her utility, Wendy should buy 1 more taco. If
she buys 1 more taco, she will consume 3 tacos and 2 movies. This combination allocates all of her income and sets the marginal utility per dollar spent
on tacos equal to that of movies, with both equal to 3 1/2 units of utility per
dollar spent.
4.
To maximize his utility, Bobby buys 4 cans of soda and 3 bags of popcorns.
This combination allocates the entire budget and equates the marginal utility per dollar spent on cans of soda and bags of popcorn, with each equal to
5 units of utility per dollar spent.
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Part 4 . A CLOSER LOOK AT DECISION MAKERS
USING EYE ON THE U.S. ECONOMY
 Relative Prices on the Move
The article provides data on relative prices. Use the data to show students that,
contrary to what they might have predicted, the relative prices of many of the
goods they buy have changed, with some falling and others rising. You can present the material by listing a number of the items on the board or overhead and
then poll students what they think has happened to the relative price. They will
probably find it surprising to see the relative prices of oranges and beef have risen while the relative prices of orange juice and coffee have fallen.
 Rational Choices in Beverage Markets
The article and data provide a good example of reallocating budgets after the
prices of goods have changed. The story provides a good explanation of what
happens to demand for a good when its price changes as people attempt to
equate marginal utility per dollar spent. Ask your students why they think these
changes occurred. In other words, did the changes occur because people’s tastes
changed or because other factors, such as supply, changed?
You also can tell your students that nowadays more people are drinking
“new age,” fruit-based beverages, such as Sobe. Ask your students how people’s
decisions to drink Sobe is reflected in their marginal utility for new-age beverages. To personalize this last example, you can ask your class how many of them
drink Sobe (or other trendy beverages, such as the many energy drinks now
available). Ask the students who volunteer that they drink these beverages what
this decision means about their marginal utility from these drinks?
USING EYE ON THE PAST
 Jeremy Bentham, William Stanley Jevons, and the Birth of Utility
The story provides background material to use for the lecture launchers. You can
remind students that these ideas are “discoveries” in terms of economics and
they allow economists to explain or better understand concepts such as the demand curve and the paradox of value.