Diminishing Marginal Utility

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Presentation transcript:

Diminishing Marginal Utility Consumer Optimum A choice of a set of goods and services that maximizes the level of satisfaction for each consumer, subject to limited income. Copyright © 2005 Pearson Education Canada Inc. 21

Diminishing Marginal Utility (1) (2) (3) (4) Total Utility Marginal Utility Videos of Videos Marginal Utility per Dollar Spent per per Period (utils) (MUv / Pv) Period (utils) MUv (price = $5) 0 0.0 1 50.0 2 95.0 3 135.0 4 171.5 5 200.0 50.0 45.0 40.0 36.5 28.5 10.0 9.0 8.0 7.3 5.7 Copyright © 2005 Pearson Education Canada Inc.

Diminishing Marginal Utility (5) (6) (7) (8) Total Utility Marginal Utility Hamburgers of Hamburgers Marginal Utility per Dollar Spent per per Period (utils) (MUh / Ph) Period (utils) MUh (price = $3) 0 0 1 25 2 47 3 65 4 80 5 89 25 22 18 15 9 8.3 7.3 6.0 5.0 3.0 Copyright © 2005 Pearson Education Canada Inc.

Diminishing Marginal Utility Marginal Utility Marginal Utility Items per Dollar per Dollar per Spent (Video) Spent (Hamburger) Period (price = $5) (price = $3) 0 --- --- 1 10.0 8.3 2 9.0 7.3 3 8.0 6.0 4 7.3 5.0 5 5.7 3.0 Copyright © 2005 Pearson Education Canada Inc. 24

Steps to Consumer Optimum Choices Videos Hamburgers Purchase Unit (MUV /PV) Unit (Muh /Ph) 1 First 10.0 First 8.3 2 Second 9.0 First 8.3 3 Third 8.0 First 8.3 4 Third 8.0 Second 7.3 5 Fourth 7.3 Second 7.3 Copyright © 2005 Pearson Education Canada Inc. 25

Steps to Consumer Optimum Buying Decision Remaining Income First video $26 - $5 = $21 Second video $21 - $5 = $16 First hamburger $16 - $3 = $13 Third video $13 - $5 = $ 8 Fourth video and $ 8 - $5 = $ 3 second hamburger $ 3 - $3 = $ 0 Copyright © 2005 Pearson Education Canada Inc. 26

Diminishing Marginal Utility A Little Math The Rule of Equal Marginal Utilities per Dollar Spent Copyright © 2005 Pearson Education Canada Inc. 29