chapter 5 utility theory Flashcards
utility definition
satisfactory/ pleasure derived from the consumption of a product
*consumers want to maximize total utility given some budget
what do consumers want to do?
want to maximize their total utility, more total utility is better than less
what is marginal utility
additional utility gained from consumption of another unit
*decreasing marginal utility for most goods for most rational consumers when they consume more
more you consume the less it benefits you; one donut is okay 7 will make u throw up
Thus more consumption is not always better
how is utility meassured
util
the value of marginal utility =
change in total utility divided by the change in quantity
the value of total utility =
sum of all the marginal utilities, or
TU3=MU1+MU2+MU3
or
TU3=MU3+TU2
maximum total utility is when marginal utility is equal to?
when marginal utility is at 0 total utility is at max
mu < 0 means
total utility is falling
what is the optimal purchasing rule
maximize total utility by purchasing in order of highest to lowest marginal utility per dollar spent, MU/$ or MU/price,
if MUx/Px > MUy/Py then you buy more of good x
you are getting more bang for your buck
how to determine what stuff someone should buy
- make / complete graph, determine mu/$ for each quantity at each mu. Do this for each product
- make a purchase order, then pick each product that has the highest, mu/p values and if there are two products with the same mu/p value, then choose the one with the most utils(mu)
then once you have spent all your money, add up your Marginal utils value and that’s the max
Dollar marginal utility
because utility is actually pretty dumb, you can measure utility in dollars rather than utils,
- declining marginal utility still exists
- $MU is the demand curve now, someone is willing to spend 15 dollars on 1 unit, but they will buy 5 units if they are cheaper,
what is dollar marginal utility saying
that you are willing to spend a certain amount of money on a product based on how much you value it, if you really love pomegranates you’re willing to spend 10$ on one
- it asks what’s the max price you’re willing to pay at this quantity
- its utility in terms of dollars VERY DIFFERENT FROM MU/$- that is to compare other products
dollar marginal utility, how is it decreasing
you are willing to pay 10$ for one pomegranate, but 8$for the second, 6$ for the third, because they have decreasing marginal utility and so on and if the price is 11$ you won’t buy any- too expensive, if they price is 9$ you still only buy one because you can’t buy half a pomegranate
what is a consumer surplus simple explanation
the difference between what a customer is willing to pay and the actual price of the product
-its not money its satisfaction for free
how to calculate marginal consumer surplus
MCS=$MU-price
what is total consumer surplus
it is the sum of all the marginal consumer surpluses derived from each successive unit consumed
TCS=SUMof all MCS at each unit
how does a consumer surplus work? (explain the math/where you are getting the values)
-at 10$ im willing to buy one pomegranate, im willing to pay 8$ for the next one,5$ for the next one (3) so for 3 pomegranates im willing to spend a total of 23$ however, if they are charging 5$/ pomegranate, i can buy 3 pomegranates for 15$ (even though I was willing to pay 23, im not willing to spend more than 10$ for one but I will pay less for the next one and so on, but right now I would be in advantage, im saving money, this is the surplus)
so $MU-price= consumer surplus
MCS=10-5=for one pomegranate that is the marginal consumer surplus.
- total consumer surplus is the sum of MCS at each unit
TCS=10+8+5-15= 8
how do you calculate Total consumer surplus when working with large quantities or divisible quantities
you calculate the area of the consumer surplus by using area of a rectangle basexheight/2
how do you calculate total revenue
price x units sold
how do you calculate total willingness to pay
you add total revenue with consumer surplus
price discrimination
for the same product, charge different customers, different prices. - the goal is to increase revenues by charging consumers closer to their max willingness to pay to get rid of some of the surplus
ways in which producers discriminate against price
- age, occupation, gender(student discount)
- time of purchase (happy hour)
- quantity purchased
how does price discrimination work
charge higher prices for certain people, this decreases the consumer surplus because there’s a small portion of people willing to pay more-and then there’s another additional amount of people willing to pay the cheaper price
how to calculate new revenue after price discrimination occurs
-old tr+ loss of consumer surplus= new revenue
