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Utility maximization
1. It can not be a financial asset, it much be an actual good.
Estimate price on board
2. What if Warren Buffett is
too busy to go shopping
so he gives you the cash.
Would you still buy the one good?
Why or why not?
Budget constraint
Does money always increase utility? Many goods vs. few
or one for consumers
Ted.org video clip
5. Indifference curves
Theory of consumer
choice
Chapter 21
People face tradeoffs
People choose based on
preferences
Rules of I.C.’s:
1. Higher the better
2. Downward sloping
“substitution effect”
3. I.C.’s do not cross “More
goods are better”
4. Bowed inward “MRS
gets smaller as you
consume”
Factors of change:
Population
Income
Preferences
6. Why can’t we buy all the goods
we want?
Scarcity again!
Consume where
indifference curve is
tangent to budget
constraint
“Utility
maximization”
Complicated b/c
preferences change
7. Calculating Utility Maximization
Use calculus to find tangency of indifference curve
against the budget constraint
OR
Use easy formula
To obtain the greatest utility the consumer should
allocate money income so that the last dollar spent on
each good or service yields the same marginal utility.
Util maximization:
8. Assumptions:
A consumer can buy oranges or apples
A consumer wants $10 to spend on fruit at the farmers
market
A consumer prefers oranges to apples
How can this consumer maximize their utility?