Mr. Bernstein Module 51: Utility Maximization September 8, 2014 AP Economics Mr. Bernstein Module 51: Utility Maximization September 8, 2014

AP Economics Mr. Bernstein Utility Maximization Consumers make choices about purchasing goods and services Consumers goal is to maximize utility, or happiness Utility is a measure of satisfaction gained from consuming a good or service Can you really measure utility? Maybe not, but consumers know it when they make decisions

AP Economics Mr. Bernstein Utility Maximization The principle of diminishing Marginal Utility (MU) applies to consumption of most goods and services. Example: Burgers?? Consumers face budget constraints and purchase the bundle which maximizes Total Utility (TU) Marginal analysis allows us to find optimal consumption bundles Note: If Marginal Utility (MU) is declining but still positive, Total Utility (TU) is rising and that unit of the good should be consumed Consumers should continue spending on a good until the MU of each good is equal. Why?

AP Economics Mr. Bernstein Marginal Utility per $ graph

AP Economics Mr. Bernstein Marginal Utility per $ table

AP Economics Mr. Bernstein Budgets and Optimal Consumption Bundle Point C is unaffordable. Point A is not optimal. Books @ $25 each B A C Movies @ $10 each