ECN 104 Lecture Notes - Mental Accounting, Budget Constraint, Marginal Utility
Document Summary
Utility maximization spend where mu/$ is highest if mu/$ = unequal, spending should be allocated award from good where mu/$ = low toward good when mu/$ = high. Income effect when price of oranges fall, there will be a substitution of now cheaper oranges increase in real income = increase consumption of both apples and oranges. Diamond-water paradox water increase u, but lowers, mu b/c diamonds are scarce. Opportunity cost & time time consumed must be included in price of product/service. To consumers, price increases = loss relative to status quo. Producers reduce package size instead of raising prices. Consumers evaluate events in a particular mental frame. New info alters the frame that consumer defines whether situations are gains or losses. Estimates of value are influenced by recent info no matter how irrelevant. Mental accounting and overpriced warranties separate purchases into mental accounts instead of looking at big picture mental accounting exaggerates any potential loss.