chapter 8

Chapter 8 Maximizing Utility Preferences • Ahousehold’s preferences determine the benefits or satisfaction a person receives consuming a good or service. • The benefit or satisfaction from consuming a good or service is called utility. Total Utility • Total utility is the total benefit a person gets from the consumption of goods. Generally, more consumption gives more utility. • Total utility from a good increases as the quantity of the good increases. Marginal Utility • Marginal utility is the change in total utility that results from a one-unit increase in the quantity of a good consumed. • As the quantity consumed of a good increases, the marginal utility from consuming it decreases. (utility has been divided into more part, thus, marginal utility decrease) • We call this decrease in marginal utility as the quantity of the good consumed increases the principle of diminishing marginal utility. The Utility-Maximizing Choice • We can find the utility-maximizing choice by looking at the total utility that arises from each affordable combination. • The utility-maximizing combination is called a consumer equilibrium. Choosing at the Margin Aconsumer’s total utility is maximized by following the rule: • Spend all available income. • Equalize the marginal utility per dollar for all goods. The marginal utility per dollar is the marginal utility from a good divided by its price. Total utility is maximized when goodAand good B have the same marginal utility per dollar. • If MUa/Pa > MUb/Pb, then MUa decrease and MUb increase • If MUa/Pa < MUb/Pb, then MUa increase and MUb decrease Predictions of Marginal Utility Theory A Fall in the Price of a Movie • When the price of a good falls the quantity demanded of that good increases—the demand curve slopes downward. • For example, if the price of a movie falls, we know that MUm/Pm rises, so before the consumer changes the quantities bought, MUm/Pm > MUp/Pp. • To restore consumer equilibrium (maximum total utility) the consumer increases the movies seen to restore MUm/Pm = MUp/Pp. A Rise in the Price of Pop • We know that MUp/Pp falls, so before the consumer changes the quantities bought, MUp/Pp < MUm/Pm. • To restore consumer equilibrium (maximum total utility) the consumer decreases the quantity of pop consumed to and increases the quantity of movies seen to drive down MUm. • These changes restore MUm/Pm = MUp/Pp. • Arise in the price of pop decreases the quantity of pop demanded—a movement along the demand curve for pop. A Rise in Income When in