Consumers [Consumer Choice & Elasticities] (Section 6) I. Definitions Utility [Felicity] (Satisfaction)- The benefit or satisfaction a person gets from a choice or action Marginal Utility (MU)- The additional utility someone gets from consuming an additional unit of a good. Marginal Utility Formula =

∆ Total Utility ∆ Quantity

Law of Diminishing Marginal Utility- As someone consumes more of a good marginal utility will eventually decline (as consume more the increase in utility will be smaller each time) ExsMarginal Benefit (MB)- Maximum price a consumer is willing to pay for an additional unit of a product. The dollar value of a consumer’s utility of consuming an additional unit: So it f______ as consumption increases

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II. The individual: Demand curve & consumer choice Marginal Benefit reexamined What does it really mean if a consumer is willing to pay up to (at most) $10 for an additional unit of the product.

Marginal Utility per $ spent:

MU Good A Price of good A
Interpret:

 MU A    P    A 

Ex: Buying one more burrito (from 1 to 2) gives you an ↑ in utility of 10 & costs $5

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A. Deriving a demand curve for slices of pizza for Carlos

Slices 0 1 2 3 4 5 6 7 8 9 10

Total Utility 0 200 390 570 740 900 1030 1130 1200 1240

MU if P
MU X 200 P=$2

MU if P
P=$1

MU if P
P=$0.50

10

Cheeseburgers That cost $0.50
Total Utility 130 240 340 430 505 555 580 595 605 610

Slices 1 2 3 4 5 6 7 8 9 10

MU 130

MU P

Carlos’ wife gives him $5 every day for lunch and any money he does not spend on lunch is stolen by his coworker Grat.

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If Carlos is a utility maximizer & pizza costs $2 how much does he buy?
Pizza bought CheeseB. he can afford Total Utility

How about if pizza costs a $1?
Pizza bought CheeseB. he can afford Total Utility

How about if pizza costs $0.50?
Pizza bought CheeseB. he can