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https://quizlet.com/_3usn80

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MU x / P x = MU y / P y

ratios must be equal

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the marginal utility of good x divided by the price of good x

must equal...

the marginal utility of good y divided by the price of good y

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total satisfaction received from consuming a given quantity of goods

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as the number of goods increases, TOTAL UTILITY increases

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as the number of goods increases, TOTAL UTILITY increases

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direct relation

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solve for total utility if given marginal utility 

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solve for total utility if given marginal utility 

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begin with first marginal utility number as the first total utility value

add marginal utility to previous total utility for current total utility value

remember: total utility increases as the number of good increases

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1. begin with 10 for total utility of pizza

2. add 8 to get 18

3. add 6 to get 24...

4. begin with 8 for total utility of songs

5. add 6 to get 14

6. add 4 to get 18...

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increase total utility by purchasing more of the good with the larger ratio 

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increase total utility by purchasing more of the good with the larger ratio 

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pizza = $2, MU of 10
soda = $1, MU of 6

MU/P of pizza = ratio of 5
MU/P of soda = ratio of 6

--> you can increase total utility by buying more soda and less pizza

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measures the change in total utility a person derives from consuming an additional unit of a good;

satisfaction gained from consuming another quantity of a good

just... one... more... cookie!

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as the number of goods increases, MARGINAL UTILITY decreases

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as the number of goods increases, MARGINAL UTILITY decreases

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inverse relation

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solve for marginal utility if given total utility

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solve for marginal utility if given total utility

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find the difference between the two total utilities values

remember:
- should be positive numbers
- marginal utility decreases as the number of goods increases

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1. 10 - 0 = 10 for marginal utility from 0 pizzas to 1 pizza

2. 18 - 10 = 8

3. 24 - 18 = 6...

4. 8 - 0 = 8 for marginal utility from 0 songs to 1 song

5. 14 - 8 = 6

6. 18 - 14 = 4...

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Maximizing Utility with the Equalization Principle

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Maximizing Utility with the Equalization Principle

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MU x / P x = MU y / P y

always make a separate column for these ratios

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take the marginal utility value and divide it by the price of the respected good

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1. take first marginal utility value for pizza of 10 and divide it by the price of pizza of $2

1. 10 / 2 = 5

2. 8 / 2 = 4

3. 6 / 2 = 3...

4. take first marginal utility value for the songs (8) and divide it by the price of a song ($1)

1. 8 / 1 = 8

5. 6 / 1 = 6

6. 4 / 1 = 4...

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the MU/P values for each good x and y are the ratios

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the MU/P values for each good x and y are the ratios

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look in the MU/P column created for both goods and see if a ratio in the x column is equal to a ratio in the y column

at what quantity is each of those ratios at for each good
- is good x at a ratio of 5 with a quantity of 2
- is good y at a ratio of 5 with a quantity of 3

... if the ratios are equal, take corresponding quantities and multiple them by the price of their respected good
--> the sum of the two products should be as close to the given budget as possible, but not exceed it

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Solving for at what quantities will utility be maximized

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Solving for at what quantities will utility be maximized

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pizza and songs both have ratios that equal 4 when...
- there are 2 pizzas purchased
- 3 songs purchased

does it maximize and fit in budget?
2($2) = $4
3($1) = $3
$4 + $3 does not equal $12

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pizza and songs both have ratios that equal 2 when there are...
- 4 pizzas purchased
- 4 songs purchased

does it maximize and fit in budget?
4($2) = $8
4($1) = $4
$8 + $4 = $12 --> GOOD TO GO

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maximize utility when the marginal utility to price ratio equal for all goods subject to the income restraint

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maximize utility when the marginal utility to price ratio equal for all goods subject to the income restraint

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when the price of a good changes, consumers will substitute toward the more relatively less-expensive good

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substitution effect changing purchases on an item with an increased price

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substitution effect changing purchases on an item with an increased price

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if price of good increases...
... I am not going to buy that good.

I am going to swap it with a cheaper, similar good

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when the price of a good falls, consumers experience an increase in purchasing power

when the price of a good increases, consumers experience a decrease in purchasing power

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income effect changing purchases on an item with an increased price

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income effect changing purchases on an item with an increased price

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if the price of a good increases...
... I am not going to buy that good.

I no longer have the purchasing power to buy the now more expensive good (since my income hasn't changed).