Utility vs. Marginal Utility

  • Utility

    • arbitrary measure of benefit one receives from an activity (measured in utils)
  • Marginal Utility

    • change in total utility generated by consuming one additional unit of that good or service

    • Air, for example, is necessary for survival but tends to have little value in terms of marginal utility.

    • Diamonds, on the other hand, provides lots of marginal utility for many consumer.

Marginal Utility Per Dollar

  • The marginal utility per dollar spent on a good considers budge constrains

  • Formula:

    • C:\\CE5A5F25\\EA5686BB-78FF-4844-9ADF-D3586C9ED368\_files\\image019.png
  • We are constrained by a budget.

  • The role of scarcity comes into play when making consumer choices.

  • Example:

    • We prefer a vacation to Hawaii over a movie, but we must consider the cost of each decision.

    • If Hawaii's marginal utility is 500 but costs $500, and a movie's marginal utility is 50 but costs $10, what do we choose?

    • Marginal Utility Per Dollar for Hawaii:C:\\CE5A5F25\\EA5686BB-78FF-4844-9ADF-D3586C9ED368\_files\\image020.png

  • Marginal Utility Per Dollar for movie: C:\\CE5A5F25\\EA5686BB-78FF-4844-9ADF-D3586C9ED368\_files\\image021.png

  • Since 5 > 1, choose movie

Diminishing Marginal Utility

  • As a person increases consumption, there is a decline in the marginal utility from consuming each additional unit of that product.

  • You get less "bang for your buck"

  • Applies to most, if not all, products at a certain point.

  • All You Can Eat restaurant can stay in business because of this principle.

Optimal Consumption Bundle

  • Marginal utility per dollar must be equal for both products

  • Formula:

    • C:\\CE5A5F25\\EA5686BB-78FF-4844-9ADF-D3586C9ED368\_files\\image022.png
  • Consumers instinctively follow this rule.

  • Within a limited budget, we are required to make choices based on what we value.

  • Keep on selecting the item that has the HIGHER marginal utility per dollar.

  • Due to diminishing marginal utility, that value begin to fall until equals the marginal utility per dollar for the other item.

  • Example 1

    Machine generated alternative text: Zach spends all his money on
wine and cheese. A bottle of wine cost s $ 30 . A p ound of cheese
cost s $ 10 . At his current consumption , Zach's marginal util ity of
a bottle of wine is 90 utils while it , s 50 utils for a pound Of
cheese . In order to maximi ze utility , what should Zach do ? MUA ¥ 《
-1 Consumph0h : M 兆 Che ese 50 Sire 5\>3, 》 0 Zach 囗 / increase 0 № 呷
0 「 ah el. 《

  • Example 2

    Machine generated alternative text: Find the marginal utility and
marginal utility per dollar for the following if apples cost $ 1 and
oranges 2 , Apples Quantity Tot al Ut ili ty 1 2 3 4 5 20 35 45 52 20
2 20 丐 2 O ranges Quant ity 1 2 3 4 5 30 30 丐 50 20 《 0 75 地 5 80 5 艺
5

  • Example 3

    Machine generated alternative text: Find the opt im al consumption
bundle for s teak and 亠 with a $ 25 budget . Steak is $ 10 , C hicken
is $ 5 . 3 〔 丐 ( 5 + k S teak Quantity MU per $ 1 10 2 8 3 6 4 4 5 2
25 一 10 | 丨 0 S Chicken Q uanti ty MU p er $ 1 2 3 4 5 5 15 / 7 5

  • Example 4

    Machine generated alternative text: Quantity of P urchase Price per
Pound MU of Last Pound Cookies 12 pounds 24 1 Bro 、 5 pounds $ 4 24
Penny spends all her money on two goods: cookies and brownies . In
order to maximize her ut ility, should Penny purchase more cookies and
less browmes and less CO Oki es , or maintain her current consumption
? Explain. MVc 00 叫 s 旧

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