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# Utility maximization

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### Utility maximization

1. 1. It can not be a financial asset, it much be an actual good. Estimate price on board
2. 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
3. 3. Utility Maximization  Consumers attempt to maximize their utility based on their budget constraint  Consumer surplus
4. 4. 11/26/11  Utility maximization  Pareto efficient?
5. 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. 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. 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. 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?
9. 9. Calculating Utility Maximization
10. 10. Calculating Utility Maximization Budget \$420 on tickets/year \$60 per game Games 1 2 3 4 5 6 7 Total Utility 10 19 27 34 40 45 49 Marginal Utility 10 9 8 7 6 5 4 Total MU/Price Games Utility 0.166667 1 9 0.15 2 18 0.133333 3 25 0.116667 4 31 0.1 5 36 0.083333 6 40 0.066667 7 44 \$60 per game Marginal Utility 9 9 7 6 5 4 4 MU/Price 0.15 0.15 0.116667 0.1 0.083333 0.066667 0.066667
11. 11. Calculating Profit Maximization
12. 12. Calculating Profit Maximization
13. 13. Mankiw  Pages 464-465  #15 then #12  EC #14