CH 7 : Utility and Demand

1. CH 7 : Utility and Demand

2. A Numerical Example : 1- Total utility :is the total benefit or satisfaction a person gets from the consumption of goods. Generally, more consumption gives more total utility.

3. 2- Marginal utility :is the additional utility a person gets from consuming an additional unit of the good. • Or it's the change in total utility that results from consuming an additional unit of the good. • The law of diminishing marginal utilitystates that, as the quantity of a good consumed increases, the marginal utility of that good decreases. • A Numerical Example :

4. 3- A consumer Equilibrium : Using marginal analysis, a consumer’s total utility is maximized when : Spend all available income and equalize the marginal utility per dollar spent on all goods. (The marginal utility per dollar spent on good is Mu of the good / price ofthe good)

5. 4- Questions : Q1 : 1- suppose that the price of one pizza is $2 & price of one Pepsi is $1 & your income is $4 ,,what is optimum consumption mix will you choose and why? 2- What is your total utility when you maximize utility? 3- If your income increased to $7 what is optimum consumption mix will you choose and why?

6. Solution steps : . . . Total utility is maximized when Spend all available income & MUgood 1/Pgood1 = MUgood2/Pgood2 . . . To solve this problem we’ve to: 1- calculate Mu of each good 2-Calculate Mu / p of each good 3- find consumption bundles at which Mugood1/p good1= Mu good 2/pgood2 4- calculate the cost of each consumption bundles 5- find the consumption bundle at which it’s cost= income

7. step 3 :Consumption bundles at which Mu pizza/p pizza = Mu Pepsi /P Pepsi are : (1 pizza &2 Pepsi ) and (2 pizza &3 Pepsi ) step 4 :The cost of each consumption bundles: cost of 1 pizza &2 Pepsi = 1 x $2 + 2 x $1 = $4 cost of 2 pizza & 3 Pepsi = 2x $2 + 3 x $1 = $7 Step 5 : Consumption bundle at which it’s cost= income cost of( 1 pizza &2 Pepsi )= $4 = income $4

8. 1- the optimum consumption mix I will choose is (1 pizza and 2 Pepsi ) because it maximize total utility as at this consumption mix all income is spent and the marginal utility per dollar spent on pizza equal the marginal utility per dollar spent on pepsi. ( Mu pizza/p pizza = Mu Pepsi / P Pepsi) . 2- total utility of (1 pizza and 2 Pepsi ) =8+9=17 unit of utility 2- if income increases to $ 7 then the optimum consumption mix I will choose is (2 pizza and 3 Pepsi ) because it maximize total utility as at this consumption mix all income is spent and Mu pizza/p pizza = Mu Pepsi /Pepsi .

9. Q2 : 1- suppose that the price of one CD is $2 & price of one book is $4 & your income is $8 ,,what is optimum consumption mix will you choose and why? 2- What is your total utility when you maximize utility? 3- If your income increased to $14 what is optimum consumption mix will you choose and why?

10. Q3 : Suppose that pizza costs $4 per slice, and Diet Pepsi, costs $2 each. The table above gives your utility from consuming these two goods. If your income is $14, • What is the optimum consumption mix will you choose? Why? • If your income increased to $20, what is the optimum consumption mix will you choose? • What is your total utility when you maximize utility?