1. Prof. Ana Corrales ECO 2023 Notes Ch. 21: Consumer Behavior & Utility Maximization Why is the demand curve downward- sloping?  Income and Substitution Effects  Law of Diminishing Marginal Utility Utility is Subjective Satisfaction is measured with units called “utils” Gains in satisfaction become smaller as successive units of a specific product are consumed

2. Prof. Ana Corrales ECO 2023 Notes Theory of Consumer Behavior Rational Behavior Preferences Budget Constraint  At any point in time, consumers have fixed, limited income Prices Each consumer will choose a mix of goods & services that they find most satisfying (i.e., highest utility)

3. Prof. Ana Corrales ECO 2023 Notes Utility-Maximizing Rule Consumers allocate income so that the last dollar spent on each product yields the same among of marginal utility MU are comparable on a per-dollar basis To find out if the utility-maximizing rule has been met:  [MU(a)/P(a)] = [MU(b)/P(b)]

4. Prof. Ana Corrales ECO 2023 Notes Applications & Extensions of Consumer Behavior & Utility Max DVDs and DVD Players Essential v. Luxury Goods The Value of Time Cost of Heath Care Cash v. Non-cash Gifts

5. Prof. Ana Corrales ECO 2023 Notes Ch. 21 Study Questions: 2 3 5 8 9