ECON 202 1st Edition Lecture 12 Outline of Last Lecture II Maximizing Utility Module 20 Outline of Current Lecture III More on Utility and Module 20 IV Exam 2 Review Current Lecture Budget Constraint the consumption version of a production possibility frontier model o o o o 10 Income Pizza 2 Hot Dogs 1 These are the only two goods in the market See graph from last lecture Any point outside of the curve is not possible because we do not have the income to buy that particular combination of pizza and hot dogs more precisely it is not affordable If there is a point within the curve you would never buy those goods because it would not make sense because we are always going to put our money to something no money really gets leftover saving counts as utility You will only ever be on the exact curve o o Utility Analysis We ideally want to pick the combination of goods that maximizes the combined utility To make things simple we only have so many combinations of goods Quantity Total Utility Quantity Total Utility 0 0 0 0 1 10 1 19 2 22 2 34 3 30 3 45 4 36 4 52 These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Possible combinations for points A F Points of Intersection Pizza Hot Dogs Total Utility A 40 0 40 B 36 19 55 C 30 34 64 D 22 45 67 E 10 52 62 F 0 55 55 Point D maximizes the total utility and is the best point of consumption 2 slices of pizza and 6 hot dogs is where you will get the most satisfaction If your income would increase the curve of goods would extend to the right and you could consume more Consuming optimally at point D If income decreases you would cut back on consumption If the prices change Pizza 2 1 and Hot Dogs 1 Marginal Utility per Dollar you want to get the most for your money Example The marginal utility from consuming a sports car MUsportscar 10 000 Psportscar 100 000 MUmovie 40 Pmovie 20 Marginal utility per dollar MUx Px MUsc Psc 10000 100000 1 MUm Pm 40 20 2 For optimal consumption optimally MUx Px MUY PY You want to increase consumption of x and decrease consumption of y EXAMPLE you are consuming optimally price of good x increases which means you should consume less of that good and more of the other good EXAMPLE Pizza and Hot Dog o Point D is at optimal consumption Quantity Total Utility Marginal Utility MU per Quantity Total Utility Marginal Utility MU per 0 0 0 0 0 0 1 10 10 5 1 19 9 5 9 5 2 22 12 6 2 34 7 5 7 5 3 30 8 4 3 45 5 5 5 5 4 36 6 3 4 52 3 5 3 5 MUpizza Priceof pizza MUhotdog Pricehotdog MUpizza Pricepizza 6 MUhotdog Pricehotdog 5 5