1. Consumer Choice and Utility Maximization

2. The Law of Diminishing “ADDITIONAL” “SATISFACTION”

3. Would you see the movie three times?
Thinking at the Margin
# Times Watching Movie
Marginal Utility
Price
1st
$30
$10
2nd
$15
3rd $5
Total
$50
Would you see the movie three times?
Notice that the total benefit is more than the total cost but you would NOT watch the movie the 3rd time.

4. Calculate Marginal Utility
# of Slices of Pizza
Total Utility
(in utils)
Marginal Utility/Benefit 1 8 2 14 3 19 4 23 5 25 6 26 7 24
How many pizzas would you buy if the price per slice was $2?

5. Calculate Marginal Utility
# of Slices of Pizza
Total Utility
(in dollars)
Marginal Utility/Benefit 1 8 2 14 6 3 19 5 4 23 25 26 7 24 -2
Marginal Cost $2
How many pizzas would you buy if the price per slice was $2?

6. Calculate Marginal Utility
# of Slices of Pizza
Total Utility
(in dollars)
Marginal Utility/Benefit 1 8 2 14 6 3 19 5 4 23 25 26 7 24 -2
Marginal Cost 2
You will continue to consume until Marginal Benefit = Marginal Cost
How many pizzas would you buy if the price per slice was $2?

7. Marginal Utility Per Dollar
CONSUMER BEHAVIOR
You plan to take a vacation and want to maximize your utility. Based on the info below, which should you choose?
Destination
Marginal Utility
(In Utils)
Price
Tahiti
3000
$3,000
Chicago
1000
$500
Marginal Utility Per Dollar
1 Util
2 Utils

8. Marginal Utility Per Dollar
CONSUMER BEHAVIOR
You plan to take a vacation and want to maximize your utility. Based on the info below, which should you choose?
Destination
Marginal Utility
(In Utils)
Price
Tahiti
3000
$3,000
Chicago
1000
$500
Marginal Utility Per Dollar
1 Util
2 Utils
Calculating Marginal Utility Per Dollar allows you to compare products with different prices.

9. Utility Maximization $10 $5
# Times
Going
Marginal Utility
(Movies)
MU/P
(Price =$10)
Marginal
Utility
(Go Carts)
(Price =$5)
1st 30 10
2nd 20 5
3rd 2
4th 1
If you only have $25, what combination of movies and go carts maximizes your utility?

10. Utility Maximization $10 $5
# Times
Going
Marginal Utility
(Movies)
MU/P
(Price =$10)
Marginal
Utility
(Go Carts)
(Price =$5)
1st 30 3 10 $2
2nd 20 5 $1
3rd 2
$.40
4th
$.50 1
$.20
If you only have $25, what combination of movies and go carts maximizes your utility?

11. Utility Maximization $10 $5
# Times
Going
Marginal Utility
(Movies)
MU/P
(Price =$10)
Marginal
Utility
(Go Carts)
(Price =$5)
1st 30 3 10 2
2nd 20 $2 5 $1
3rd
$.40
4th
$.50 1
$.20
If you only have $25, what combination of movies and go carts maximizes your utility?

12. Utility Maximization $10 $5
# Times
Going
Marginal Utility
(Movies)
MU/P
(Price =$10)
Marginal
Utility
(Go Carts)
(Price =$5)
1st 30 3 10 2
2nd 20 5 1
3rd
.40
4th
.50
.20
If you only have $25, what combination of movies and go carts maximizes your utility?

13. Production= Converting inputs into output
Widget Production Simulation
Production= Converting inputs into output

14. Analyzing Production
Lets look at an example to show the relationship between inputs and outputs

15. Production Simulation
Overview
The class will be divided into two firms.
There will be several rounds in which each firm will produce chains out of paper.
Each round last exactly 2 minutes
Each firm is going to hire one more worker at the start of each round.
Resources
1 stapler, 1 scissors, 1 table, and plenty of staples and paper
Rules
Workers cannot stockpile slips of paper. No extras
Workers cannot cut more than one paper at a time
Workers can only add links to one side of the chain
Each link must pass inspection
If links don’t meet specifications they won’t count
Responsibilities
The manager will hire the workers.
The inspector will check to make sure each product is made to specifications

16. Production Simulation
Step 1: Cut paper down the middle into two piece
Step 2: Fold piece down the middle
Step 3: Wrap ends around and staple
Step 4: Add more links to one end

17. Production Simulation
Complete the chart for your firm:
Number of Workers (inputs)
Total Product (output)
Marginal Product 1 2 3 4 5 6

18. Simulation Debrief Key Questions:
What happened to the number on links produced as more workers were hired?
Why can the second worker generate more additional links than one worker working alone?
Why did the additional output for each worker eventually start to fall or even go negative?
What would happen to total output if every student in the room tried to make links given the limited resources?

19. Simulation Debrief Fixed Resources-
Resources that DON’T change with the amount produced
Ex: Stapler, scissors, and table
Variable Resources-
Resources that DO change as more or less is produced
Ex: Workers, paper, and staples

20. Simulation Debrief
Total Physical Product (TP)- total output or quantity produced
Marginal Product (MP)- the additional output generated by additional inputs (workers).
Marginal Product =
Change in Total Product
Change in Inputs
Average Product (AP)- the output per unit of input
Average Product =
Total Product
Units of Labor

21. The Law of Diminishing Marginal Returns Too many cooks in the kitchen!
Production Analysis
What happens to the Total Product as you hire more workers?
What happens to marginal product as you hire more workers?
Why does this happens?
The Law of Diminishing Marginal Returns
As variable resources (workers) are added to fixed resources (machinery, tool, etc.), the additional output produced from each new worker will eventually fall.
Too many cooks in the kitchen!