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Chapter 6

Chapter 6 Consumer Behavior.docx

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Economics (Arts)
ECON 208
Mayssun El- Attar Vilalta

Chapter 6 Human Behavior 61 Marginal Utility and Consumer ChoiceUtility the satisfactionwellbeing that a consumer receives from consuming some goodserviceTotal utility the total satisfaction resulting from the consumption of a given commodity by a consumerMarginal utility the additional satisfaction obtained from consuming 1 additional unit of commodity Diminishing Marginal UtilityLaw of diminishing marginal utility The utility that any consumer derives from successive units of a particular product consumed over some period of time diminishes as total consumption of the product increases if the consumption of all other products is unchangedMin quantity of waterwould pay a lot for itmarginal utility of water is high the fewer L you are already using the higher the marginal utility of one more L of water if consume more than minmarginal utility of successive L of water declines steadily Utility Schedules and GraphsTotal utility rises as increased consumption of coke but the utility from each additional cokeday isthat of the previous onemarginal utility declines as the quantity consumedie total utility rises but marginal utility declines as consumption increases Maximizing Utilityeconomists assume that consumers seek to maximize their total utility subject to the constraints they facein particular their income and the market prices of various products The Consumers Decisionto maximize utility a consumer should consume any two goods or any number of goods until the marginal utility per dollar spent on the last product1 is equal to the marginal utility per dollar spent on the last product2 consumed A utilitymaximizing consumer allocates expenditures so that the utility obtained from the last dollar spent on each product is equalEx B3 C1 utility from the lastspent on C is 3x utility from lastspent on Btotal utility by switching aof expenditure from B to C and by gaining the difference between the utilities of a dollar spent on each To maximize utility continue switching expenditure from B to C as long as lastspent on C yields more utility than lastspent on B This switching however reduces the quantity of B consumed and given the law of diminishing marginal utility the marginal utility of B At the same time switching the quantity of C consumed and thereby lowers the marginal utility of C When marginal utilities changed so that the utility received from the lastspent on C isto utility from lastspent on B gain of nothing from further switches rather there is reduction of total utilityThe condition required for a consumer to be maximizing utility for any pair of products is MUxMUyutilitymaximizing consumer will allocate expenditure so that the utility gainedPxPyfrom the last dollar spent on any other productA consumer w a given amount of income to spend demands each good up to the point at which the marginal utility peron it is the same as the marginal utility perspent on every other 1
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