1. KRUGMAN'S MICROECONOMICS for AP* Utility Maximization Margaret Ray and David Anderson Micro: Econ: 15 51 Module

2. What you will learn in this Module : How consumers make choices about the purchase of goods and services Why a consumer’s goal is to maximizing utility Why the principle of diminishing marginal utility applies to the consumption of most goods and services How to use marginal analysis to find the optimal consumption bundle

3. Maximizing utility In the Theory of Consumer Choice, consumers’ goal is to maximize their utility (=happiness or satisfaction) Measured in “utils”

4. Total Utility As we consume more, our total utility increases but at a decreasing rate. Each successive unit gives us a little less pleasure than the one before. This is “marginal utility” until we experience “disutility” We will consume until our MU=0. At that point, our TU is at its peak. Diminishing Marginal Utility MU= TU Q

5. Budgets-force us to choose Need to consider utility per dollar to compensate for wide differences in prices (gum vs diamonds) so look at MU/P (marginal utility per dollar) Consumer selects product(s) that provides highest MU/P for each purchase. If 2 are the same, arbitrary select Consumer allocates scarce resources (i.e income) among all goods so that satisfaction (MU/P) is equal (aka “utility maximization rule” MU/Px = MU/Py =MU/Pz Consumer is in equilibrium and will not change unless MU or P changes for one of the products=“optimal consumption rule”

6. Spending the Marginal Dollar CDs P=$2/CD Gas P=$1/gal Movie P=$3/tix UNITSMUMU/PUNITSMUMU/PUNITSMUMU/P 12001001200 115050 298492150 29030 35025350 36020 4105430 4 10 If Budget is $10 Highest MU/P ItemBudget leftover MU/P Final buy 1 st buy200Gas$10 -1=93 GasGas =50 2 nd buy150Gas$9-1=82 CDCD = 50 3 rd buy100CD$8-2=61 MovieMovie=49 4 th buy50Gas$6-1=5 5 th buy50Movie$5-3=2 6 th buy49CD$2-2=0