AP Economics Mr. Bernstein Utility Maximization

Report
AP Economics
Mr. Bernstein
Module 51:
Utility Maximization
September 8, 2014
AP Economics
Mr. Bernstein
Utility Maximization
• Consumers make choices about purchasing goods
and services
• Consumers goal is to maximize utility, or happiness
• Utility is a measure of satisfaction gained from
consuming a good or service
• Can you really measure utility? Maybe not, but
consumers know it when they make decisions
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AP Economics
Mr. Bernstein
Utility Maximization
• The principle of diminishing Marginal Utility (MU) applies to
consumption of most goods and services. Example:
Burgers??
• Consumers face budget constraints and purchase the bundle
which maximizes Total Utility (TU)
• Marginal analysis allows us to find optimal consumption
bundles
• Note: If Marginal Utility (MU) is declining but still positive,
Total Utility (TU) is rising and that unit of the good should be
consumed
• Consumers should continue spending on a good until the MU
of each good is equal. Why?
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AP Economics
Mr. Bernstein
Budgets and Optimal Consumption Bundle
• Point C is unaffordable. Point A is not optimal.
Books
@ $25
each
B
C
A
Movies @ $10 each
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