MONDAY: 210 -- 400 IN209
THURSDAY 12:10 - 200 GE313
THURSDAY OCT 18 FROM 6:10 - 8:10 IN SS2106
Test 1: not required to find optimal consumption bundle, given prices, utility and
budget
○ Without calculus, this can only be done by “trial and error”
○ Will be expected to understand the principle of optimization (ASSIGN
4)
Consumer Demand Theory Con’t
3. Consumers seek to maximize utility (satisfaction), subject to budget
constraint
● Principle of Diminishing Marginal Utility: As a person consumes more of a
good, the marginal utility of the good declines. This principle, plus rational
behavior: EXPLAINS:
○ 1) The rule of maximizing total utility (satisfaction), given the consumer’s
budget constraint
○ 2) Why demand curves slope downwards
● Rational Behaviour:
○ Maximize total utility, given budge (income) constraint
● Result: Allocate income so that the marginal utility of the LAST unit of each goos
consume, divided by its price, is the same for all CONSUMED goods.
● Observation:
○ 1) Straightforward to show using calculus (2nd year)
○ 2) Motivate with example (1st year)
3.1 Optimizing Rule
3.2 Example
● Numerical example: Optimal Consumption
○ Decisions
○ Consumer's Budget: $14 (per week), Price: Apples $ 2, Beets $ 4
■ We have to know how much you enjoy, how much utility you derive
from consumption
■ Both example accords to the priciple of diminishing utility
○ Departing from the optimization rule, you can do better
Apples Beets
Q TU MU Q TU MU 0 0 - 0 0 -
1 80 80(additional 1 100 100
utility
consuming that
first apple)
2 140 60 2 180 80
3 180 40 3 240 60
4 200 20 4 280 40
5 210 10 5 300 20
○ Alternative Consumption Choices
○ If you know what your weekly budget is, what your preferences are, you
would never allocate your income so that the total utility would be 310
instead of 360 [want highest possible of satisfaction]
#1 #2
3 Apples, 2 Beets 5 Apples, 1 Beet
1. Expenditure $ 14 $14
2. MUA / PA 20 (40 / 2)5 (10 / 2)
MUB / PB 20 (80 / 4)25 (100 / 4) ( 25 is much higher than 5)
3. MUA /PA = MUB /PB? YES NO
(optimizin
g rule is
satisfied
Case 1)
4.Total Utility 360 310
5. To maximize No Consume

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