1. Unit 3: Utility
Ap Micro 9/27

2. Warm Up What is marginal utility? What is utility for that matter?
Use the concept of marginal utility to explain the following: Newspaper vending machines are designed so that once you have paid for one paper, you can take more than one paper at a time. But soda vending machines, once you have paid for one soda, dispense only one soda at a time. Why?

3. Utility and Consumption
Utility: satisfaction gained from consumption
Not the same as usefulness
Subjective and difficult to quantify
Utils = units of utility
Consumption bundle: set of all goods and services a person consumes
Utility function: relationship between consumption bundle and total utility generated

4. Law of Diminishing Marginal Utility
Marginal utility: the change in total utility from consuming one more unit
Diminishing Marginal Utility: Additional satisfaction declines as a consumer acquires additional units of a given product

5. Total Utility and Marginal Utility
Total utility (utils)
(a)
Cassie’s Utility Function 70 15 13 11 9 7 5 3 1 –1 28 39 48 55 60 63 64
Total utility (utils)
Marginal utility per clam (utils) 2 4 6 8
Quantity of clams 60
Utility function 50 40 30 20 10 1 2 3 4 5 6 7 8 9
Quantity of clams
Marginal utility per clams (utils) ( b )
Cassie’s Marginal Utility Curve
Figure Caption: Figure 10-1: Cassie’s Total Utility and Marginal Utility
Panel (a) shows how Cassie’s total utility depends on her consumption of fried clams. It increases until it reaches its maximum utility level of 64 utils at 8 clams consumed and decreases after that. Marginal utility is calculated in the table. Panel (b) shows the marginal utility curve, which slopes down- ward due to diminishing marginal utility. That is, each additional clam gives Cassie less utility than the previous clam. 16 14 12 10 8
Marginal Utility Curve 6 4 2 –2 1 2 3 4 5 6 7 8 9
Quantity of clams

6. Practice Problems
Explain why a rational consumer who has diminishing marginal utility for a good would not consume an additional unit when it generates negative marginal utility, even when that unit is free. What might be an example of this?
Marta drinks 3 cups of coffee a day, for which she has diminishing marginal utility. Which of her 3 cups generates the greatest increase in total utility? Which generates the least?
In each of the following cases, does the consumer has diminishing, constant, or increasing marginal utility?
The more Mabel exercises, the more she enjoys each additional visit to the gym.
Although Mei’s CD collection is huge, her enjoyment from buying another CD has not changed as her collection has grown.
When Dexter was a struggling student, his enjoyment of a good restaurant meal was greater than now, when he has them more frequently.

7. Marginal Utility and Demand
The law of diminishing marginal utility explains the downward slope of the demand curve
Supports the idea that price must decrease in order for quantity demanded to increase

8. Theory of Consumer Behavior
Law of diminishing marginal utility helps explain how consumers allocate their money
The situation for the typical consumer has the following dimensions:
Rational behavior: Consumers use their income to maximize their utility
Preferences: Each consumer has preferences for specific goods and know how much MU they will gain from successive units

9. Theory of Consumer Behavior
The situation for the typical consumer has the following dimensions:
Budget constraint: Every consumer has a fixed, limited amount of money income
Prices: Prices reflect scarcity. Assume that the price of a good is unaffected by the amount of it that is bought by any particular person

10. Budgets
Consumption possibilities: set of all consumption bundles that can be consumed given the consumer’s income and prevailing prices
Budget line: all of the consumption bundles available to a consumer who spends all of his/her income

11. Budget Line Sammy’s income = $20/week Potatoes = $2/lb; clams = $4/lb
Quantity of potatoes
(pounds) A B C D E F
Consumption bundle 1 2 3 4 5
Quantity of clams
(pounds) 10 8 6
Quantity of potatoes
Unaffordable consumption bundles 10 A 8 B 6 C
Affordable consumption bundles that cost all of Sammy's income 4
Affordable consumption bundles D 2 E F
Sammy’s Budget Line, BL 1 2 3 4 5
Quantity of clams (pounds)
The budget line represents all the possible combinations of quantities of potatoes and clams that Sammy can purchase if he spends all of his income. It is also the boundary between the set of affordable consumption bundles (the consumption possibilities) and unaffordable ones.

12. Budget Constraints
Budget constraints aren’t just about money. In fact, there are many other budget constraints affecting our lives.
Examples are:
Limited amount of closet space for clothes.
A fixed number of hours in a day.
A dieter on the Weight Watchers plan is only allowed a maximum number of points regarding the food they can eat each day whereby each food is assigned a certain number of points. (The dieter is just like a consumer choosing a consumption bundle: points are the equivalent of prices, and the overall point limit is the equivalent of total income.)