Household Behavior Working With Utility Data• Pizza slices cost $4.00 each• Drafts are $2.00 each• Your budget is 20Pizza UtilitySlices Total Utility Marginal Utility0 0 --1 10 102 18 83 24 64 28 45 30 2Beverage UtilityMugs Total Utility Marginal Utility0 0 --1 5 52 9 43 12 34 15 35 17 26 19 27 20 18 21 1Consumption possibilitiesPizza Drafts5 04 23 42 61 80 10Our goal: maximize total utility Why? That's the heart of our choices How? Add pizza utility plus drafts utilityPizza Pizza Utility Drafts Drafts Utility Total Utility5 30 0 0 304 28 2 9 373 24 4 15 392 18 6 19 371 10 8 21 310 0 10 21 21Rational decisions focus on the margin.Utility Maximizing Rule MUx = MUy = MUz Px Py PzWhere: MU- Marginal Utility P- PriceIf the benefit per dollar is higher for pizza, spend more on pizzaIf the benefit per dollar is lower for pizza, spend more on draftsWhen the last dollar spent produces same benefit, then we have maximized.Pizza 4$ MU Drafts 2$ MU Decision Rule5 2 0 --4 4 2 4 4/4 < 4/23 6 4 3 6/4 = 3/22 8 6 2 8/4 > 2/21 10 8 1 10/4 > 1/20 -- 10 0Example:Going to the movies….• This movie: 10$ of utility • Cost of discount ticket: 4$ (Sub-cost)• Cost of box office ticket: $8Worth it even though total cost = $12 because the marginal cost is $8 which is less than $10Sub-cost fallacy: tempted to calculate the sub-cost into the total costConcert: 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
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