Slices Marginal Utility Pizza Utility Total Utility Mugs Marginal Utility Beverage Utility Total Utility 10 8 6 4 2 5 4 3 3 2 2 1 1 Household Behavior Working With Utility Data Pizza slices cost 4 00 each Drafts are 2 00 each Your budget is 20 0 1 2 3 4 5 0 1 2 3 4 5 6 7 8 Consumption possibilities Pizza Drafts 5 0 4 2 3 4 2 6 1 8 0 10 Our goal maximize total utility Why That s the heart of our choices How Add pizza utility plus drafts utility 5 4 3 2 1 0 30 28 24 18 10 0 Rational decisions focus on the margin 0 10 18 24 28 30 0 5 9 12 15 17 19 20 21 0 2 4 6 8 10 Pizza Pizza Utility Drafts Drafts Utility Total Utility 0 9 15 19 21 21 30 37 39 37 31 21 cid 127 cid 127 cid 127 Utility Maximizing Rule MUx MUy MUz Px Py Pz Where MU Marginal Utility P Price If the benefit per dollar is higher for pizza spend more on pizza If the benefit per dollar is lower for pizza spend more on drafts When the last dollar spent produces same benefit then we have maximized Pizza 4 Drafts 2 Decision Rule 5 4 3 2 1 0 MU 2 4 6 8 10 0 2 4 6 8 10 MU 4 3 2 1 0 4 4 4 2 6 4 3 2 8 4 2 2 10 4 1 2 Example Going to the movies This movie 10 of utility Cost of discount ticket 4 Sub cost Cost of box office ticket 8 Worth it even though total cost 12 because the marginal cost is 8 which is less than 10 Sub cost fallacy tempted to calculate the sub cost into the total cost Concert You re sick stay home But you spent all this money so you want to go But if you re so miserable you won t enjoy it the marginal cost of going is 0 therefore stay home RATIONAL DECISION cid 127 cid 127 cid 127
View Full Document
Unlocking...