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Ch. 21: Consumer Behavior & Utility Maximization. Why is the demand curve downward-sloping? Income and Substitution Effects Law of Diminishing Marginal Utility Utility is Subjective Satisfaction is measured with units called “utils”

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ch 21 consumer behavior utility maximization
Ch. 21: Consumer Behavior & Utility Maximization
  • Why is the demand curve downward-sloping?
    • Income and Substitution Effects
    • Law of Diminishing Marginal Utility
      • Utility is Subjective
      • Satisfaction is measured with units called “utils”
      • Gains in satisfaction become smaller as successive units of a specific product are consumed

Prof. Ana Corrales ECO 2023 Notes

theory of consumer behavior
Theory of Consumer Behavior
  • Rational Behavior
  • Preferences
  • Budget Constraint
    • At any point in time, consumers have fixed, limited income
  • Prices
  • Each consumer will choose a mix of goods & services that they find most satisfying (i.e., highest utility)

Prof. Ana Corrales ECO 2023 Notes

utility maximizing rule
Utility-Maximizing Rule
  • Consumers allocate income so that the last dollar spent on each product yields the same among of marginal utility
  • MU are comparable on a per-dollar basis
  • To find out if the utility-maximizing rule has been met:
    • [MU(a)/P(a)] = [MU(b)/P(b)]

Prof. Ana Corrales ECO 2023 Notes

applications extensions of consumer behavior utility max
Applications & Extensions of Consumer Behavior & Utility Max
  • DVDs and DVD Players
  • Essential v. Luxury Goods
  • The Value of Time
  • Cost of Heath Care
  • Cash v. Non-cash Gifts

Prof. Ana Corrales ECO 2023 Notes

ch 21 study questions
Ch. 21 Study Questions:
  • 2
  • 3
  • 5
  • 8
  • 9

Prof. Ana Corrales ECO 2023 Notes