econ 101: principles of microeconomics · the rational consumer one of the key assumptions...
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![Page 1: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/1.jpg)
Econ 101: Principles of MicroeconomicsCh. 10: The Rational Consumer
Fall 2010
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 1 / 28
![Page 2: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/2.jpg)
Outline
1 Utility: Getting Satisfaction
2 Budgets and Optimal Consumption
3 The Optimal Consumption Choice
4 Spending the Marginal Dollar
5 From Utility to the Demand Curve
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 2 / 28
![Page 3: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/3.jpg)
The Rational Consumer
One of the key assumptions underlying economics is the concept ofthe rational consumer
; i.e., that individuals know what they want andseek to make the most of the available opportunities given thescarcity constraints they face.
Notice that there are two key components here:1 The notion that individuals have preferences: This defines what they
want to consume.2 The notion that individuals have constraints: These define what they
can consume.
In this chapter, we will
- Define more precisely what we mean by each of these notions.- Use them to determine how the individual can then make choices so as
to maximize their well-being (or utility).
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 3 / 28
![Page 4: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/4.jpg)
The Rational Consumer
One of the key assumptions underlying economics is the concept ofthe rational consumer ; i.e., that individuals know what they want andseek to make the most of the available opportunities given thescarcity constraints they face.
Notice that there are two key components here:1 The notion that individuals have preferences: This defines what they
want to consume.2 The notion that individuals have constraints: These define what they
can consume.
In this chapter, we will
- Define more precisely what we mean by each of these notions.- Use them to determine how the individual can then make choices so as
to maximize their well-being (or utility).
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 3 / 28
![Page 5: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/5.jpg)
The Rational Consumer
One of the key assumptions underlying economics is the concept ofthe rational consumer ; i.e., that individuals know what they want andseek to make the most of the available opportunities given thescarcity constraints they face.
Notice that there are two key components here:
1 The notion that individuals have preferences: This defines what theywant to consume.
2 The notion that individuals have constraints: These define what theycan consume.
In this chapter, we will
- Define more precisely what we mean by each of these notions.- Use them to determine how the individual can then make choices so as
to maximize their well-being (or utility).
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 3 / 28
![Page 6: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/6.jpg)
The Rational Consumer
One of the key assumptions underlying economics is the concept ofthe rational consumer ; i.e., that individuals know what they want andseek to make the most of the available opportunities given thescarcity constraints they face.
Notice that there are two key components here:1 The notion that individuals have preferences: This defines what they
want to consume.
2 The notion that individuals have constraints: These define what theycan consume.
In this chapter, we will
- Define more precisely what we mean by each of these notions.- Use them to determine how the individual can then make choices so as
to maximize their well-being (or utility).
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 3 / 28
![Page 7: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/7.jpg)
The Rational Consumer
One of the key assumptions underlying economics is the concept ofthe rational consumer ; i.e., that individuals know what they want andseek to make the most of the available opportunities given thescarcity constraints they face.
Notice that there are two key components here:1 The notion that individuals have preferences: This defines what they
want to consume.2 The notion that individuals have constraints: These define what they
can consume.
In this chapter, we will
- Define more precisely what we mean by each of these notions.- Use them to determine how the individual can then make choices so as
to maximize their well-being (or utility).
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 3 / 28
![Page 8: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/8.jpg)
The Rational Consumer
One of the key assumptions underlying economics is the concept ofthe rational consumer ; i.e., that individuals know what they want andseek to make the most of the available opportunities given thescarcity constraints they face.
Notice that there are two key components here:1 The notion that individuals have preferences: This defines what they
want to consume.2 The notion that individuals have constraints: These define what they
can consume.
In this chapter, we will
- Define more precisely what we mean by each of these notions.
- Use them to determine how the individual can then make choices so asto maximize their well-being (or utility).
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 3 / 28
![Page 9: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/9.jpg)
The Rational Consumer
One of the key assumptions underlying economics is the concept ofthe rational consumer ; i.e., that individuals know what they want andseek to make the most of the available opportunities given thescarcity constraints they face.
Notice that there are two key components here:1 The notion that individuals have preferences: This defines what they
want to consume.2 The notion that individuals have constraints: These define what they
can consume.
In this chapter, we will
- Define more precisely what we mean by each of these notions.- Use them to determine how the individual can then make choices so as
to maximize their well-being (or utility).
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 3 / 28
![Page 10: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/10.jpg)
Utility: Getting Satisfaction
Utility
The first concept is that individuals have preferences
; i.e., we assumethat individuals can look at two alternatives and state either
1 that they prefer one alternative over the other2 or that they are entirely indifferent between the two alternatives (i.e.,
they like them equally).
The overall measure of the person’s well-being is called their utility
It is assumed that these preferences are logically consistent (ortransitive).For example:
- If the individual says they prefer apples to oranges- . . . and they say they prefer oranges to peaches- . . . then they will prefer apples to peaches.
It is important to note that we are not saying
That preference cannot change over timeThat individual preferences can (or even should) be compared.
We are also not commenting on what people like, but simplyassuming that they have a consistent set of preferences.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 4 / 28
![Page 11: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/11.jpg)
Utility: Getting Satisfaction
Utility
The first concept is that individuals have preferences; i.e., we assumethat individuals can look at two alternatives and state either
1 that they prefer one alternative over the other2 or that they are entirely indifferent between the two alternatives (i.e.,
they like them equally).
The overall measure of the person’s well-being is called their utility
It is assumed that these preferences are logically consistent (ortransitive).For example:
- If the individual says they prefer apples to oranges- . . . and they say they prefer oranges to peaches- . . . then they will prefer apples to peaches.
It is important to note that we are not saying
That preference cannot change over timeThat individual preferences can (or even should) be compared.
We are also not commenting on what people like, but simplyassuming that they have a consistent set of preferences.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 4 / 28
![Page 12: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/12.jpg)
Utility: Getting Satisfaction
Utility
The first concept is that individuals have preferences; i.e., we assumethat individuals can look at two alternatives and state either
1 that they prefer one alternative over the other
2 or that they are entirely indifferent between the two alternatives (i.e.,they like them equally).
The overall measure of the person’s well-being is called their utility
It is assumed that these preferences are logically consistent (ortransitive).For example:
- If the individual says they prefer apples to oranges- . . . and they say they prefer oranges to peaches- . . . then they will prefer apples to peaches.
It is important to note that we are not saying
That preference cannot change over timeThat individual preferences can (or even should) be compared.
We are also not commenting on what people like, but simplyassuming that they have a consistent set of preferences.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 4 / 28
![Page 13: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/13.jpg)
Utility: Getting Satisfaction
Utility
The first concept is that individuals have preferences; i.e., we assumethat individuals can look at two alternatives and state either
1 that they prefer one alternative over the other2 or that they are entirely indifferent between the two alternatives (i.e.,
they like them equally).
The overall measure of the person’s well-being is called their utility
It is assumed that these preferences are logically consistent (ortransitive).For example:
- If the individual says they prefer apples to oranges- . . . and they say they prefer oranges to peaches- . . . then they will prefer apples to peaches.
It is important to note that we are not saying
That preference cannot change over timeThat individual preferences can (or even should) be compared.
We are also not commenting on what people like, but simplyassuming that they have a consistent set of preferences.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 4 / 28
![Page 14: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/14.jpg)
Utility: Getting Satisfaction
Utility
The first concept is that individuals have preferences; i.e., we assumethat individuals can look at two alternatives and state either
1 that they prefer one alternative over the other2 or that they are entirely indifferent between the two alternatives (i.e.,
they like them equally).
The overall measure of the person’s well-being is called their utility
It is assumed that these preferences are logically consistent (ortransitive).For example:
- If the individual says they prefer apples to oranges- . . . and they say they prefer oranges to peaches- . . . then they will prefer apples to peaches.
It is important to note that we are not saying
That preference cannot change over timeThat individual preferences can (or even should) be compared.
We are also not commenting on what people like, but simplyassuming that they have a consistent set of preferences.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 4 / 28
![Page 15: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/15.jpg)
Utility: Getting Satisfaction
Utility
The first concept is that individuals have preferences; i.e., we assumethat individuals can look at two alternatives and state either
1 that they prefer one alternative over the other2 or that they are entirely indifferent between the two alternatives (i.e.,
they like them equally).
The overall measure of the person’s well-being is called their utility
It is assumed that these preferences are logically consistent (ortransitive).
For example:
- If the individual says they prefer apples to oranges- . . . and they say they prefer oranges to peaches- . . . then they will prefer apples to peaches.
It is important to note that we are not saying
That preference cannot change over timeThat individual preferences can (or even should) be compared.
We are also not commenting on what people like, but simplyassuming that they have a consistent set of preferences.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 4 / 28
![Page 16: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/16.jpg)
Utility: Getting Satisfaction
Utility
The first concept is that individuals have preferences; i.e., we assumethat individuals can look at two alternatives and state either
1 that they prefer one alternative over the other2 or that they are entirely indifferent between the two alternatives (i.e.,
they like them equally).
The overall measure of the person’s well-being is called their utility
It is assumed that these preferences are logically consistent (ortransitive).For example:
- If the individual says they prefer apples to oranges
- . . . and they say they prefer oranges to peaches- . . . then they will prefer apples to peaches.
It is important to note that we are not saying
That preference cannot change over timeThat individual preferences can (or even should) be compared.
We are also not commenting on what people like, but simplyassuming that they have a consistent set of preferences.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 4 / 28
![Page 17: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/17.jpg)
Utility: Getting Satisfaction
Utility
The first concept is that individuals have preferences; i.e., we assumethat individuals can look at two alternatives and state either
1 that they prefer one alternative over the other2 or that they are entirely indifferent between the two alternatives (i.e.,
they like them equally).
The overall measure of the person’s well-being is called their utility
It is assumed that these preferences are logically consistent (ortransitive).For example:
- If the individual says they prefer apples to oranges- . . . and they say they prefer oranges to peaches
- . . . then they will prefer apples to peaches.
It is important to note that we are not saying
That preference cannot change over timeThat individual preferences can (or even should) be compared.
We are also not commenting on what people like, but simplyassuming that they have a consistent set of preferences.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 4 / 28
![Page 18: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/18.jpg)
Utility: Getting Satisfaction
Utility
The first concept is that individuals have preferences; i.e., we assumethat individuals can look at two alternatives and state either
1 that they prefer one alternative over the other2 or that they are entirely indifferent between the two alternatives (i.e.,
they like them equally).
The overall measure of the person’s well-being is called their utility
It is assumed that these preferences are logically consistent (ortransitive).For example:
- If the individual says they prefer apples to oranges- . . . and they say they prefer oranges to peaches- . . . then they will prefer apples to peaches.
It is important to note that we are not saying
That preference cannot change over timeThat individual preferences can (or even should) be compared.
We are also not commenting on what people like, but simplyassuming that they have a consistent set of preferences.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 4 / 28
![Page 19: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/19.jpg)
Utility: Getting Satisfaction
Utility
The first concept is that individuals have preferences; i.e., we assumethat individuals can look at two alternatives and state either
1 that they prefer one alternative over the other2 or that they are entirely indifferent between the two alternatives (i.e.,
they like them equally).
The overall measure of the person’s well-being is called their utility
It is assumed that these preferences are logically consistent (ortransitive).For example:
- If the individual says they prefer apples to oranges- . . . and they say they prefer oranges to peaches- . . . then they will prefer apples to peaches.
It is important to note that we are not saying
That preference cannot change over timeThat individual preferences can (or even should) be compared.
We are also not commenting on what people like, but simplyassuming that they have a consistent set of preferences.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 4 / 28
![Page 20: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/20.jpg)
Utility: Getting Satisfaction
Utility
The first concept is that individuals have preferences; i.e., we assumethat individuals can look at two alternatives and state either
1 that they prefer one alternative over the other2 or that they are entirely indifferent between the two alternatives (i.e.,
they like them equally).
The overall measure of the person’s well-being is called their utility
It is assumed that these preferences are logically consistent (ortransitive).For example:
- If the individual says they prefer apples to oranges- . . . and they say they prefer oranges to peaches- . . . then they will prefer apples to peaches.
It is important to note that we are not saying
That preference cannot change over time
That individual preferences can (or even should) be compared.
We are also not commenting on what people like, but simplyassuming that they have a consistent set of preferences.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 4 / 28
![Page 21: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/21.jpg)
Utility: Getting Satisfaction
Utility
The first concept is that individuals have preferences; i.e., we assumethat individuals can look at two alternatives and state either
1 that they prefer one alternative over the other2 or that they are entirely indifferent between the two alternatives (i.e.,
they like them equally).
The overall measure of the person’s well-being is called their utility
It is assumed that these preferences are logically consistent (ortransitive).For example:
- If the individual says they prefer apples to oranges- . . . and they say they prefer oranges to peaches- . . . then they will prefer apples to peaches.
It is important to note that we are not saying
That preference cannot change over timeThat individual preferences can (or even should) be compared.
We are also not commenting on what people like, but simplyassuming that they have a consistent set of preferences.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 4 / 28
![Page 22: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/22.jpg)
Utility: Getting Satisfaction
Utility
The first concept is that individuals have preferences; i.e., we assumethat individuals can look at two alternatives and state either
1 that they prefer one alternative over the other2 or that they are entirely indifferent between the two alternatives (i.e.,
they like them equally).
The overall measure of the person’s well-being is called their utility
It is assumed that these preferences are logically consistent (ortransitive).For example:
- If the individual says they prefer apples to oranges- . . . and they say they prefer oranges to peaches- . . . then they will prefer apples to peaches.
It is important to note that we are not saying
That preference cannot change over timeThat individual preferences can (or even should) be compared.
We are also not commenting on what people like, but simplyassuming that they have a consistent set of preferences.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 4 / 28
![Page 23: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/23.jpg)
Utility: Getting Satisfaction
The Utility Function
The individuals overall measure of well-being (i.e., their utility) isassumed to depend on their consumption bundle; i.e., the set goodsand services consumed by the individual.
The relationship between an individual’s consumption bundle and thetotal utility it generates for that individual is called the individual’sutility function.
While the units used to measure utility are not important, we’ll usethe hypothetical units: utils.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 5 / 28
![Page 24: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/24.jpg)
Utility: Getting Satisfaction
The Utility Function
The individuals overall measure of well-being (i.e., their utility) isassumed to depend on their consumption bundle; i.e., the set goodsand services consumed by the individual.
The relationship between an individual’s consumption bundle and thetotal utility it generates for that individual is called the individual’sutility function.
While the units used to measure utility are not important, we’ll usethe hypothetical units: utils.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 5 / 28
![Page 25: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/25.jpg)
Utility: Getting Satisfaction
The Utility Function
The individuals overall measure of well-being (i.e., their utility) isassumed to depend on their consumption bundle; i.e., the set goodsand services consumed by the individual.
The relationship between an individual’s consumption bundle and thetotal utility it generates for that individual is called the individual’sutility function.
While the units used to measure utility are not important, we’ll usethe hypothetical units: utils.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 5 / 28
![Page 26: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/26.jpg)
Utility: Getting Satisfaction
Total versus Marginal Utility
Suppose we are considering an individual’s (say Anne’s) preferencestowards pizza.
We could measure how much Total Utility she receives from a givenquantity of pizza over a two-week period.
In general, we would expect that her total utility increases as sheconsumes additional pizza, though at some point she is likely to gettired of pizza and actually view it as a bad.
It is also useful to think in terms of Marginal Utility;i.e., the additionalutility generated by consuming one more unit of a good or service.
This will help us in applying marginal analysis to the decisions madeby the consumer.
The Marginal Utility Curve graphical marginal utility as a function ofthe quantity consumed.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 6 / 28
![Page 27: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/27.jpg)
Utility: Getting Satisfaction
Total versus Marginal Utility
Suppose we are considering an individual’s (say Anne’s) preferencestowards pizza.
We could measure how much Total Utility she receives from a givenquantity of pizza over a two-week period.
In general, we would expect that her total utility increases as sheconsumes additional pizza, though at some point she is likely to gettired of pizza and actually view it as a bad.
It is also useful to think in terms of Marginal Utility;i.e., the additionalutility generated by consuming one more unit of a good or service.
This will help us in applying marginal analysis to the decisions madeby the consumer.
The Marginal Utility Curve graphical marginal utility as a function ofthe quantity consumed.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 6 / 28
![Page 28: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/28.jpg)
Utility: Getting Satisfaction
Total versus Marginal Utility
Suppose we are considering an individual’s (say Anne’s) preferencestowards pizza.
We could measure how much Total Utility she receives from a givenquantity of pizza over a two-week period.
In general, we would expect that her total utility increases as sheconsumes additional pizza
, though at some point she is likely to gettired of pizza and actually view it as a bad.
It is also useful to think in terms of Marginal Utility;i.e., the additionalutility generated by consuming one more unit of a good or service.
This will help us in applying marginal analysis to the decisions madeby the consumer.
The Marginal Utility Curve graphical marginal utility as a function ofthe quantity consumed.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 6 / 28
![Page 29: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/29.jpg)
Utility: Getting Satisfaction
Total versus Marginal Utility
Suppose we are considering an individual’s (say Anne’s) preferencestowards pizza.
We could measure how much Total Utility she receives from a givenquantity of pizza over a two-week period.
In general, we would expect that her total utility increases as sheconsumes additional pizza, though at some point she is likely to gettired of pizza and actually view it as a bad.
It is also useful to think in terms of Marginal Utility;i.e., the additionalutility generated by consuming one more unit of a good or service.
This will help us in applying marginal analysis to the decisions madeby the consumer.
The Marginal Utility Curve graphical marginal utility as a function ofthe quantity consumed.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 6 / 28
![Page 30: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/30.jpg)
Utility: Getting Satisfaction
Total versus Marginal Utility
Suppose we are considering an individual’s (say Anne’s) preferencestowards pizza.
We could measure how much Total Utility she receives from a givenquantity of pizza over a two-week period.
In general, we would expect that her total utility increases as sheconsumes additional pizza, though at some point she is likely to gettired of pizza and actually view it as a bad.
It is also useful to think in terms of Marginal Utility
;i.e., the additionalutility generated by consuming one more unit of a good or service.
This will help us in applying marginal analysis to the decisions madeby the consumer.
The Marginal Utility Curve graphical marginal utility as a function ofthe quantity consumed.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 6 / 28
![Page 31: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/31.jpg)
Utility: Getting Satisfaction
Total versus Marginal Utility
Suppose we are considering an individual’s (say Anne’s) preferencestowards pizza.
We could measure how much Total Utility she receives from a givenquantity of pizza over a two-week period.
In general, we would expect that her total utility increases as sheconsumes additional pizza, though at some point she is likely to gettired of pizza and actually view it as a bad.
It is also useful to think in terms of Marginal Utility;i.e., the additionalutility generated by consuming one more unit of a good or service.
This will help us in applying marginal analysis to the decisions madeby the consumer.
The Marginal Utility Curve graphical marginal utility as a function ofthe quantity consumed.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 6 / 28
![Page 32: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/32.jpg)
Utility: Getting Satisfaction
Total versus Marginal Utility
Suppose we are considering an individual’s (say Anne’s) preferencestowards pizza.
We could measure how much Total Utility she receives from a givenquantity of pizza over a two-week period.
In general, we would expect that her total utility increases as sheconsumes additional pizza, though at some point she is likely to gettired of pizza and actually view it as a bad.
It is also useful to think in terms of Marginal Utility;i.e., the additionalutility generated by consuming one more unit of a good or service.
This will help us in applying marginal analysis to the decisions madeby the consumer.
The Marginal Utility Curve graphical marginal utility as a function ofthe quantity consumed.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 6 / 28
![Page 33: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/33.jpg)
Utility: Getting Satisfaction
Total versus Marginal Utility
Suppose we are considering an individual’s (say Anne’s) preferencestowards pizza.
We could measure how much Total Utility she receives from a givenquantity of pizza over a two-week period.
In general, we would expect that her total utility increases as sheconsumes additional pizza, though at some point she is likely to gettired of pizza and actually view it as a bad.
It is also useful to think in terms of Marginal Utility;i.e., the additionalutility generated by consuming one more unit of a good or service.
This will help us in applying marginal analysis to the decisions madeby the consumer.
The Marginal Utility Curve graphical marginal utility as a function ofthe quantity consumed.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 6 / 28
![Page 34: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/34.jpg)
Utility: Getting Satisfaction
Anne’s Utility from PizzaNumber of Pizzas Total Utility Marginal Utility
0 0
501 50
382 88
333 121
294 150
255 175
216 196
187 214
158 229
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 7 / 28
![Page 35: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/35.jpg)
Utility: Getting Satisfaction
Anne’s Utility from PizzaNumber of Pizzas Total Utility Marginal Utility
0 050
1 5038
2 8833
3 12129
4 15025
5 17521
6 19618
7 21415
8 229
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 7 / 28
![Page 36: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/36.jpg)
Utility: Getting Satisfaction
Anne’s Utility from PizzaNumber of Pizzas Total Utility Marginal Utility
0 050
1 50
382 88
333 121
294 150
255 175
216 196
187 214
158 229
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 7 / 28
![Page 37: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/37.jpg)
Utility: Getting Satisfaction
Anne’s Utility from PizzaNumber of Pizzas Total Utility Marginal Utility
0 050
1 5038
2 8833
3 12129
4 15025
5 17521
6 19618
7 21415
8 229
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 7 / 28
![Page 38: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/38.jpg)
Utility: Getting Satisfaction
Anne’s Utility from PizzaNumber of Pizzas Total Utility Marginal Utility
0 050
1 5038
2 88
333 121
294 150
255 175
216 196
187 214
158 229
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 7 / 28
![Page 39: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/39.jpg)
Utility: Getting Satisfaction
Anne’s Utility from PizzaNumber of Pizzas Total Utility Marginal Utility
0 050
1 5038
2 8833
3 12129
4 15025
5 17521
6 19618
7 21415
8 229
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 7 / 28
![Page 40: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/40.jpg)
Utility: Getting Satisfaction
Anne’s Utility from PizzaNumber of Pizzas Total Utility Marginal Utility
0 050
1 5038
2 8833
3 121
294 150
255 175
216 196
187 214
158 229
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 7 / 28
![Page 41: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/41.jpg)
Utility: Getting Satisfaction
Anne’s Utility from PizzaNumber of Pizzas Total Utility Marginal Utility
0 050
1 5038
2 8833
3 12129
4 15025
5 17521
6 19618
7 21415
8 229
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 7 / 28
![Page 42: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/42.jpg)
Utility: Getting Satisfaction
Anne’s Utility from PizzaNumber of Pizzas Total Utility Marginal Utility
0 050
1 5038
2 8833
3 12129
4 150
255 175
216 196
187 214
158 229
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 7 / 28
![Page 43: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/43.jpg)
Utility: Getting Satisfaction
Anne’s Utility from PizzaNumber of Pizzas Total Utility Marginal Utility
0 050
1 5038
2 8833
3 12129
4 15025
5 17521
6 19618
7 21415
8 229
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 7 / 28
![Page 44: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/44.jpg)
Utility: Getting Satisfaction
Anne’s Utility from PizzaNumber of Pizzas Total Utility Marginal Utility
0 050
1 5038
2 8833
3 12129
4 15025
5 175
216 196
187 214
158 229
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 7 / 28
![Page 45: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/45.jpg)
Utility: Getting Satisfaction
Anne’s Utility from PizzaNumber of Pizzas Total Utility Marginal Utility
0 050
1 5038
2 8833
3 12129
4 15025
5 17521
6 19618
7 21415
8 229
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 7 / 28
![Page 46: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/46.jpg)
Utility: Getting Satisfaction
Anne’s Utility from PizzaNumber of Pizzas Total Utility Marginal Utility
0 050
1 5038
2 8833
3 12129
4 15025
5 17521
6 196
187 214
158 229
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 7 / 28
![Page 47: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/47.jpg)
Utility: Getting Satisfaction
Anne’s Utility from PizzaNumber of Pizzas Total Utility Marginal Utility
0 050
1 5038
2 8833
3 12129
4 15025
5 17521
6 19618
7 21415
8 229
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 7 / 28
![Page 48: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/48.jpg)
Utility: Getting Satisfaction
Anne’s Utility from PizzaNumber of Pizzas Total Utility Marginal Utility
0 050
1 5038
2 8833
3 12129
4 15025
5 17521
6 19618
7 214
158 229
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 7 / 28
![Page 49: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/49.jpg)
Utility: Getting Satisfaction
Anne’s Utility from PizzaNumber of Pizzas Total Utility Marginal Utility
0 050
1 5038
2 8833
3 12129
4 15025
5 17521
6 19618
7 21415
8 229
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 7 / 28
![Page 50: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/50.jpg)
Utility: Getting Satisfaction
Anne’s Utility from PizzaNumber of Pizzas Total Utility Marginal Utility
0 050
1 5038
2 8833
3 12129
4 15025
5 17521
6 19618
7 21415
8 229
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 7 / 28
![Page 51: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/51.jpg)
Utility: Getting Satisfaction
The Total Utility Curve
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 8 / 28
![Page 52: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/52.jpg)
Utility: Getting Satisfaction
The Total Utility Curve
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 8 / 28
![Page 53: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/53.jpg)
Utility: Getting Satisfaction
The Total Utility Curve
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 8 / 28
![Page 54: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/54.jpg)
Utility: Getting Satisfaction
The Total Utility Curve
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 8 / 28
![Page 55: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/55.jpg)
Utility: Getting Satisfaction
The Total Utility Curve
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 8 / 28
![Page 56: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/56.jpg)
Utility: Getting Satisfaction
The Total Utility Curve
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 8 / 28
![Page 57: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/57.jpg)
Utility: Getting Satisfaction
The Total Utility Curve
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 8 / 28
![Page 58: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/58.jpg)
Utility: Getting Satisfaction
The Total Utility Curve
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 8 / 28
![Page 59: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/59.jpg)
Utility: Getting Satisfaction
The Total Utility Curve
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 8 / 28
![Page 60: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/60.jpg)
Utility: Getting Satisfaction
The Marginal Utility Curve
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 9 / 28
![Page 61: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/61.jpg)
Utility: Getting Satisfaction
The Marginal Utility Curve
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 9 / 28
![Page 62: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/62.jpg)
Utility: Getting Satisfaction
The Marginal Utility Curve
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 9 / 28
![Page 63: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/63.jpg)
Utility: Getting Satisfaction
The Marginal Utility Curve
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 9 / 28
![Page 64: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/64.jpg)
Utility: Getting Satisfaction
The Marginal Utility Curve
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 9 / 28
![Page 65: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/65.jpg)
Utility: Getting Satisfaction
The Marginal Utility Curve
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 9 / 28
![Page 66: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/66.jpg)
Utility: Getting Satisfaction
The Marginal Utility Curve
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 9 / 28
![Page 67: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/67.jpg)
Utility: Getting Satisfaction
The Marginal Utility Curve
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 9 / 28
![Page 68: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/68.jpg)
Utility: Getting Satisfaction
The Marginal Utility Curve
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 9 / 28
![Page 69: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/69.jpg)
Utility: Getting Satisfaction
The Principle of Diminishing Marginal Utility
Notice that the marginal (or additional) utility Anne receives frompizza decreases as she consumes more and more pizza.
This is known as the Principle of Diminishing Marginal Utility, whichsays that each successive unit of a good or service consumed adds lessto total utility than the previous unit.
If you think about it, this is true of most commodities.
However, there are exceptions, particularly for commodities in which
Experience alters the enjoyment (e.g., downhill skiiing)Consumption is only useful after a given quantity is reached (e.g.,wallpaper).
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 10 / 28
![Page 70: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/70.jpg)
Utility: Getting Satisfaction
The Principle of Diminishing Marginal Utility
Notice that the marginal (or additional) utility Anne receives frompizza decreases as she consumes more and more pizza.
This is known as the Principle of Diminishing Marginal Utility, whichsays that each successive unit of a good or service consumed adds lessto total utility than the previous unit.
If you think about it, this is true of most commodities.
However, there are exceptions, particularly for commodities in which
Experience alters the enjoyment (e.g., downhill skiiing)Consumption is only useful after a given quantity is reached (e.g.,wallpaper).
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 10 / 28
![Page 71: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/71.jpg)
Utility: Getting Satisfaction
The Principle of Diminishing Marginal Utility
Notice that the marginal (or additional) utility Anne receives frompizza decreases as she consumes more and more pizza.
This is known as the Principle of Diminishing Marginal Utility, whichsays that each successive unit of a good or service consumed adds lessto total utility than the previous unit.
If you think about it, this is true of most commodities.
However, there are exceptions, particularly for commodities in which
Experience alters the enjoyment (e.g., downhill skiiing)Consumption is only useful after a given quantity is reached (e.g.,wallpaper).
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 10 / 28
![Page 72: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/72.jpg)
Utility: Getting Satisfaction
The Principle of Diminishing Marginal Utility
Notice that the marginal (or additional) utility Anne receives frompizza decreases as she consumes more and more pizza.
This is known as the Principle of Diminishing Marginal Utility, whichsays that each successive unit of a good or service consumed adds lessto total utility than the previous unit.
If you think about it, this is true of most commodities.
However, there are exceptions, particularly for commodities in which
Experience alters the enjoyment (e.g., downhill skiiing)Consumption is only useful after a given quantity is reached (e.g.,wallpaper).
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 10 / 28
![Page 73: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/73.jpg)
Utility: Getting Satisfaction
The Principle of Diminishing Marginal Utility
Notice that the marginal (or additional) utility Anne receives frompizza decreases as she consumes more and more pizza.
This is known as the Principle of Diminishing Marginal Utility, whichsays that each successive unit of a good or service consumed adds lessto total utility than the previous unit.
If you think about it, this is true of most commodities.
However, there are exceptions, particularly for commodities in which
Experience alters the enjoyment (e.g., downhill skiiing)
Consumption is only useful after a given quantity is reached (e.g.,wallpaper).
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 10 / 28
![Page 74: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/74.jpg)
Utility: Getting Satisfaction
The Principle of Diminishing Marginal Utility
Notice that the marginal (or additional) utility Anne receives frompizza decreases as she consumes more and more pizza.
This is known as the Principle of Diminishing Marginal Utility, whichsays that each successive unit of a good or service consumed adds lessto total utility than the previous unit.
If you think about it, this is true of most commodities.
However, there are exceptions, particularly for commodities in which
Experience alters the enjoyment (e.g., downhill skiiing)Consumption is only useful after a given quantity is reached (e.g.,wallpaper).
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 10 / 28
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Budgets and Optimal Consumption
How Much Pizza to Consume?
With no other constraints, what would determine how much pizzaAnne should eat?
She should continue to eat pizza as long as she enjoyed eating thelast pizza.; i.e., as long as the marginal utility from the last pizza ispositive
But in reality, there are constraints and trade-offs Anne faces. Whatare they?
- Anne only has so much money with which to buy pizza; i.e., she facesa budget constraint.
- In addition, because she has a limited budget, buying pizza means shemay not have enough money to buy other things, like movie tickets.
While the previous section defined the utility function as describingwhat we want to consume, the current section focuses on the budgetconstraint determines what we can consume.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 11 / 28
![Page 76: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/76.jpg)
Budgets and Optimal Consumption
How Much Pizza to Consume?
With no other constraints, what would determine how much pizzaAnne should eat?
She should continue to eat pizza as long as she enjoyed eating thelast pizza.
; i.e., as long as the marginal utility from the last pizza ispositive
But in reality, there are constraints and trade-offs Anne faces. Whatare they?
- Anne only has so much money with which to buy pizza; i.e., she facesa budget constraint.
- In addition, because she has a limited budget, buying pizza means shemay not have enough money to buy other things, like movie tickets.
While the previous section defined the utility function as describingwhat we want to consume, the current section focuses on the budgetconstraint determines what we can consume.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 11 / 28
![Page 77: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/77.jpg)
Budgets and Optimal Consumption
How Much Pizza to Consume?
With no other constraints, what would determine how much pizzaAnne should eat?
She should continue to eat pizza as long as she enjoyed eating thelast pizza.; i.e., as long as the marginal utility from the last pizza ispositive
But in reality, there are constraints and trade-offs Anne faces. Whatare they?
- Anne only has so much money with which to buy pizza; i.e., she facesa budget constraint.
- In addition, because she has a limited budget, buying pizza means shemay not have enough money to buy other things, like movie tickets.
While the previous section defined the utility function as describingwhat we want to consume, the current section focuses on the budgetconstraint determines what we can consume.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 11 / 28
![Page 78: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/78.jpg)
Budgets and Optimal Consumption
How Much Pizza to Consume?
With no other constraints, what would determine how much pizzaAnne should eat?
She should continue to eat pizza as long as she enjoyed eating thelast pizza.; i.e., as long as the marginal utility from the last pizza ispositive
But in reality, there are constraints and trade-offs Anne faces. Whatare they?
- Anne only has so much money with which to buy pizza; i.e., she facesa budget constraint.
- In addition, because she has a limited budget, buying pizza means shemay not have enough money to buy other things, like movie tickets.
While the previous section defined the utility function as describingwhat we want to consume, the current section focuses on the budgetconstraint determines what we can consume.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 11 / 28
![Page 79: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/79.jpg)
Budgets and Optimal Consumption
How Much Pizza to Consume?
With no other constraints, what would determine how much pizzaAnne should eat?
She should continue to eat pizza as long as she enjoyed eating thelast pizza.; i.e., as long as the marginal utility from the last pizza ispositive
But in reality, there are constraints and trade-offs Anne faces. Whatare they?
- Anne only has so much money with which to buy pizza; i.e., she facesa budget constraint.
- In addition, because she has a limited budget, buying pizza means shemay not have enough money to buy other things, like movie tickets.
While the previous section defined the utility function as describingwhat we want to consume, the current section focuses on the budgetconstraint determines what we can consume.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 11 / 28
![Page 80: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/80.jpg)
Budgets and Optimal Consumption
How Much Pizza to Consume?
With no other constraints, what would determine how much pizzaAnne should eat?
She should continue to eat pizza as long as she enjoyed eating thelast pizza.; i.e., as long as the marginal utility from the last pizza ispositive
But in reality, there are constraints and trade-offs Anne faces. Whatare they?
- Anne only has so much money with which to buy pizza; i.e., she facesa budget constraint.
- In addition, because she has a limited budget, buying pizza means shemay not have enough money to buy other things, like movie tickets.
While the previous section defined the utility function as describingwhat we want to consume, the current section focuses on the budgetconstraint determines what we can consume.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 11 / 28
![Page 81: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/81.jpg)
Budgets and Optimal Consumption
How Much Pizza to Consume?
With no other constraints, what would determine how much pizzaAnne should eat?
She should continue to eat pizza as long as she enjoyed eating thelast pizza.; i.e., as long as the marginal utility from the last pizza ispositive
But in reality, there are constraints and trade-offs Anne faces. Whatare they?
- Anne only has so much money with which to buy pizza; i.e., she facesa budget constraint.
- In addition, because she has a limited budget, buying pizza means shemay not have enough money to buy other things, like movie tickets.
While the previous section defined the utility function as describingwhat we want to consume, the current section focuses on the budgetconstraint determines what we can consume.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 11 / 28
![Page 82: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/82.jpg)
Budgets and Optimal Consumption
The Budget Constraint
A budget constraint requires that the cost of a consumer’sconsumption bundle be no more than the consumer’s income.
Anne doesn’t buy as much pizza as she can- not only because she stops enjoying more pizza (i.e.,her marginal utility
from pizza eventually becomes zero),- but also because she only has a limited amount of money to spend on
anything.
The consumption possibilities set is the set of all the possibleconsumption bundles that the consumer can afford given their income.
The budget line identifies all the possible consumption bundles thatare available to the consumer who spends all of their income.Consider a person
whose available income is given by Ywho can only spend money on one of two goods: X1 and X2
who faces prices for these two goods denoted by P1 and P2,respectively.
The budget line is then given by: P1X1 + P2X2 = Y .
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 12 / 28
![Page 83: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/83.jpg)
Budgets and Optimal Consumption
The Budget Constraint
A budget constraint requires that the cost of a consumer’sconsumption bundle be no more than the consumer’s income.Anne doesn’t buy as much pizza as she can
- not only because she stops enjoying more pizza (i.e.,her marginal utilityfrom pizza eventually becomes zero),
- but also because she only has a limited amount of money to spend onanything.
The consumption possibilities set is the set of all the possibleconsumption bundles that the consumer can afford given their income.
The budget line identifies all the possible consumption bundles thatare available to the consumer who spends all of their income.Consider a person
whose available income is given by Ywho can only spend money on one of two goods: X1 and X2
who faces prices for these two goods denoted by P1 and P2,respectively.
The budget line is then given by: P1X1 + P2X2 = Y .
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 12 / 28
![Page 84: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/84.jpg)
Budgets and Optimal Consumption
The Budget Constraint
A budget constraint requires that the cost of a consumer’sconsumption bundle be no more than the consumer’s income.Anne doesn’t buy as much pizza as she can
- not only because she stops enjoying more pizza (i.e.,her marginal utilityfrom pizza eventually becomes zero),
- but also because she only has a limited amount of money to spend onanything.
The consumption possibilities set is the set of all the possibleconsumption bundles that the consumer can afford given their income.
The budget line identifies all the possible consumption bundles thatare available to the consumer who spends all of their income.Consider a person
whose available income is given by Ywho can only spend money on one of two goods: X1 and X2
who faces prices for these two goods denoted by P1 and P2,respectively.
The budget line is then given by: P1X1 + P2X2 = Y .
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 12 / 28
![Page 85: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/85.jpg)
Budgets and Optimal Consumption
The Budget Constraint
A budget constraint requires that the cost of a consumer’sconsumption bundle be no more than the consumer’s income.Anne doesn’t buy as much pizza as she can
- not only because she stops enjoying more pizza (i.e.,her marginal utilityfrom pizza eventually becomes zero),
- but also because she only has a limited amount of money to spend onanything.
The consumption possibilities set is the set of all the possibleconsumption bundles that the consumer can afford given their income.
The budget line identifies all the possible consumption bundles thatare available to the consumer who spends all of their income.Consider a person
whose available income is given by Ywho can only spend money on one of two goods: X1 and X2
who faces prices for these two goods denoted by P1 and P2,respectively.
The budget line is then given by: P1X1 + P2X2 = Y .
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 12 / 28
![Page 86: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/86.jpg)
Budgets and Optimal Consumption
The Budget Constraint
A budget constraint requires that the cost of a consumer’sconsumption bundle be no more than the consumer’s income.Anne doesn’t buy as much pizza as she can
- not only because she stops enjoying more pizza (i.e.,her marginal utilityfrom pizza eventually becomes zero),
- but also because she only has a limited amount of money to spend onanything.
The consumption possibilities set is the set of all the possibleconsumption bundles that the consumer can afford given their income.
The budget line identifies all the possible consumption bundles thatare available to the consumer who spends all of their income.Consider a person
whose available income is given by Ywho can only spend money on one of two goods: X1 and X2
who faces prices for these two goods denoted by P1 and P2,respectively.
The budget line is then given by: P1X1 + P2X2 = Y .
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 12 / 28
![Page 87: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/87.jpg)
Budgets and Optimal Consumption
The Budget Constraint
A budget constraint requires that the cost of a consumer’sconsumption bundle be no more than the consumer’s income.Anne doesn’t buy as much pizza as she can
- not only because she stops enjoying more pizza (i.e.,her marginal utilityfrom pizza eventually becomes zero),
- but also because she only has a limited amount of money to spend onanything.
The consumption possibilities set is the set of all the possibleconsumption bundles that the consumer can afford given their income.
The budget line identifies all the possible consumption bundles thatare available to the consumer who spends all of their income.
Consider a personwhose available income is given by Ywho can only spend money on one of two goods: X1 and X2
who faces prices for these two goods denoted by P1 and P2,respectively.
The budget line is then given by: P1X1 + P2X2 = Y .
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 12 / 28
![Page 88: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/88.jpg)
Budgets and Optimal Consumption
The Budget Constraint
A budget constraint requires that the cost of a consumer’sconsumption bundle be no more than the consumer’s income.Anne doesn’t buy as much pizza as she can
- not only because she stops enjoying more pizza (i.e.,her marginal utilityfrom pizza eventually becomes zero),
- but also because she only has a limited amount of money to spend onanything.
The consumption possibilities set is the set of all the possibleconsumption bundles that the consumer can afford given their income.
The budget line identifies all the possible consumption bundles thatare available to the consumer who spends all of their income.Consider a person
whose available income is given by Y
who can only spend money on one of two goods: X1 and X2
who faces prices for these two goods denoted by P1 and P2,respectively.
The budget line is then given by: P1X1 + P2X2 = Y .
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 12 / 28
![Page 89: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/89.jpg)
Budgets and Optimal Consumption
The Budget Constraint
A budget constraint requires that the cost of a consumer’sconsumption bundle be no more than the consumer’s income.Anne doesn’t buy as much pizza as she can
- not only because she stops enjoying more pizza (i.e.,her marginal utilityfrom pizza eventually becomes zero),
- but also because she only has a limited amount of money to spend onanything.
The consumption possibilities set is the set of all the possibleconsumption bundles that the consumer can afford given their income.
The budget line identifies all the possible consumption bundles thatare available to the consumer who spends all of their income.Consider a person
whose available income is given by Ywho can only spend money on one of two goods: X1 and X2
who faces prices for these two goods denoted by P1 and P2,respectively.
The budget line is then given by: P1X1 + P2X2 = Y .
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 12 / 28
![Page 90: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/90.jpg)
Budgets and Optimal Consumption
The Budget Constraint
A budget constraint requires that the cost of a consumer’sconsumption bundle be no more than the consumer’s income.Anne doesn’t buy as much pizza as she can
- not only because she stops enjoying more pizza (i.e.,her marginal utilityfrom pizza eventually becomes zero),
- but also because she only has a limited amount of money to spend onanything.
The consumption possibilities set is the set of all the possibleconsumption bundles that the consumer can afford given their income.
The budget line identifies all the possible consumption bundles thatare available to the consumer who spends all of their income.Consider a person
whose available income is given by Ywho can only spend money on one of two goods: X1 and X2
who faces prices for these two goods denoted by P1 and P2,respectively.
The budget line is then given by: P1X1 + P2X2 = Y .
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 12 / 28
![Page 91: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/91.jpg)
Budgets and Optimal Consumption
The Budget Constraint
A budget constraint requires that the cost of a consumer’sconsumption bundle be no more than the consumer’s income.Anne doesn’t buy as much pizza as she can
- not only because she stops enjoying more pizza (i.e.,her marginal utilityfrom pizza eventually becomes zero),
- but also because she only has a limited amount of money to spend onanything.
The consumption possibilities set is the set of all the possibleconsumption bundles that the consumer can afford given their income.
The budget line identifies all the possible consumption bundles thatare available to the consumer who spends all of their income.Consider a person
whose available income is given by Ywho can only spend money on one of two goods: X1 and X2
who faces prices for these two goods denoted by P1 and P2,respectively.
The budget line is then given by: P1X1 + P2X2 = Y .
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 12 / 28
![Page 92: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/92.jpg)
Budgets and Optimal Consumption
Anne’s Budget Constraint
Suppose that Anne has a monthly budget of $50 (i.e., Y = 50).
Suppose she can spend this money on either pizza (X1) or movies(X2).
Finally, suppose that
- A pizza costs $10 (i.e., P1 = 10)- A movie ticket costs $5 (i.e., P2 = 5)
Then Anne’s budget line is given by:
10X1 + 5X2 = 50 (1)
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 13 / 28
![Page 93: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/93.jpg)
Budgets and Optimal Consumption
Anne’s Budget Constraint
Suppose that Anne has a monthly budget of $50 (i.e., Y = 50).
Suppose she can spend this money on either pizza (X1) or movies(X2).
Finally, suppose that
- A pizza costs $10 (i.e., P1 = 10)- A movie ticket costs $5 (i.e., P2 = 5)
Then Anne’s budget line is given by:
10X1 + 5X2 = 50 (1)
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 13 / 28
![Page 94: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/94.jpg)
Budgets and Optimal Consumption
Anne’s Budget Constraint
Suppose that Anne has a monthly budget of $50 (i.e., Y = 50).
Suppose she can spend this money on either pizza (X1) or movies(X2).
Finally, suppose that
- A pizza costs $10 (i.e., P1 = 10)
- A movie ticket costs $5 (i.e., P2 = 5)
Then Anne’s budget line is given by:
10X1 + 5X2 = 50 (1)
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 13 / 28
![Page 95: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/95.jpg)
Budgets and Optimal Consumption
Anne’s Budget Constraint
Suppose that Anne has a monthly budget of $50 (i.e., Y = 50).
Suppose she can spend this money on either pizza (X1) or movies(X2).
Finally, suppose that
- A pizza costs $10 (i.e., P1 = 10)- A movie ticket costs $5 (i.e., P2 = 5)
Then Anne’s budget line is given by:
10X1 + 5X2 = 50 (1)
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 13 / 28
![Page 96: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/96.jpg)
Budgets and Optimal Consumption
Anne’s Budget Constraint
Suppose that Anne has a monthly budget of $50 (i.e., Y = 50).
Suppose she can spend this money on either pizza (X1) or movies(X2).
Finally, suppose that
- A pizza costs $10 (i.e., P1 = 10)- A movie ticket costs $5 (i.e., P2 = 5)
Then Anne’s budget line is given by:
10X1 + 5X2 = 50 (1)
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 13 / 28
![Page 97: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/97.jpg)
Budgets and Optimal Consumption
Budget Line in Table Form
We can consider Anne’s budget constraint in tabular form
Pizza Movies
Quantity (X1) Expenditure Quantity (X2) Expenditure
0 0 10 50
1 10 8 40
2 20 6 30
3 30 4 20
4 40 2 10
5 50 0 0
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 14 / 28
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Budgets and Optimal Consumption
Budget Line in Table Form
We can consider Anne’s budget constraint in tabular form
Pizza Movies
Quantity (X1) Expenditure Quantity (X2) Expenditure
0 0 10 50
1 10 8 40
2 20 6 30
3 30 4 20
4 40 2 10
5 50 0 0
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 14 / 28
![Page 99: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/99.jpg)
Budgets and Optimal Consumption
Budget Line in Table Form
We can consider Anne’s budget constraint in tabular form
Pizza Movies
Quantity (X1) Expenditure Quantity (X2) Expenditure
0 0 10 50
1 10 8 40
2 20 6 30
3 30 4 20
4 40 2 10
5 50 0 0
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 14 / 28
![Page 100: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/100.jpg)
Budgets and Optimal Consumption
Budget Line in Table Form
We can consider Anne’s budget constraint in tabular form
Pizza Movies
Quantity (X1) Expenditure Quantity (X2) Expenditure
0 0 10 50
1 10 8 40
2 20 6 30
3 30 4 20
4 40 2 10
5 50 0 0
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 14 / 28
![Page 101: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/101.jpg)
Budgets and Optimal Consumption
Budget Line in Table Form
We can consider Anne’s budget constraint in tabular form
Pizza Movies
Quantity (X1) Expenditure Quantity (X2) Expenditure
0 0 10 50
1 10 8 40
2 20 6 30
3 30 4 20
4 40 2 10
5 50 0 0
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 14 / 28
![Page 102: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/102.jpg)
Budgets and Optimal Consumption
Budget Line in Table Form
We can consider Anne’s budget constraint in tabular form
Pizza Movies
Quantity (X1) Expenditure Quantity (X2) Expenditure
0 0 10 50
1 10 8 40
2 20 6 30
3 30 4 20
4 40 2 10
5 50 0 0
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 14 / 28
![Page 103: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/103.jpg)
Budgets and Optimal Consumption
Budget Line in Table Form
We can consider Anne’s budget constraint in tabular form
Pizza Movies
Quantity (X1) Expenditure Quantity (X2) Expenditure
0 0 10 50
1 10 8 40
2 20 6 30
3 30 4 20
4 40 2 10
5 50 0 0
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 14 / 28
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Budgets and Optimal Consumption
The Budget Line
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 15 / 28
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Budgets and Optimal Consumption
The Budget Line
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 15 / 28
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Budgets and Optimal Consumption
The Budget Line
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 15 / 28
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Budgets and Optimal Consumption
The Budget Line
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 15 / 28
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Budgets and Optimal Consumption
The Budget Line
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 15 / 28
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Budgets and Optimal Consumption
The Budget Line
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 15 / 28
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Budgets and Optimal Consumption
The Budget Line
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 15 / 28
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Budgets and Optimal Consumption
The Budget Line
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 15 / 28
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Budgets and Optimal Consumption
The Budget Line
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 15 / 28
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Budgets and Optimal Consumption
Aside: The Budget Line’s Slope
The budget constraints slope measures the amount of one good thatmust be sacrificed in order to buy more of another good
Remember that the budget line is:P1X1 + P2X2 = Y .
We can rewrite our budget line as X2 = YP2− P1
P2X1
The slope of the budget line is −P1P2
In our example −P1P2
= −2Ann must give up 2 movies to get 1 pizza.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 16 / 28
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Budgets and Optimal Consumption
Aside: The Budget Line’s Slope
The budget constraints slope measures the amount of one good thatmust be sacrificed in order to buy more of another good
Remember that the budget line is:P1X1 + P2X2 = Y .
We can rewrite our budget line as X2 = YP2− P1
P2X1
The slope of the budget line is −P1P2
In our example −P1P2
= −2Ann must give up 2 movies to get 1 pizza.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 16 / 28
![Page 115: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/115.jpg)
Budgets and Optimal Consumption
Aside: The Budget Line’s Slope
The budget constraints slope measures the amount of one good thatmust be sacrificed in order to buy more of another good
Remember that the budget line is:P1X1 + P2X2 = Y .
We can rewrite our budget line as X2 = YP2− P1
P2X1
The slope of the budget line is −P1P2
In our example −P1P2
= −2Ann must give up 2 movies to get 1 pizza.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 16 / 28
![Page 116: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/116.jpg)
Budgets and Optimal Consumption
Aside: The Budget Line’s Slope
The budget constraints slope measures the amount of one good thatmust be sacrificed in order to buy more of another good
Remember that the budget line is:P1X1 + P2X2 = Y .
We can rewrite our budget line as X2 = YP2− P1
P2X1
The slope of the budget line is −P1P2
In our example −P1P2
= −2Ann must give up 2 movies to get 1 pizza.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 16 / 28
![Page 117: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/117.jpg)
Budgets and Optimal Consumption
Aside: The Budget Line’s Slope
The budget constraints slope measures the amount of one good thatmust be sacrificed in order to buy more of another good
Remember that the budget line is:P1X1 + P2X2 = Y .
We can rewrite our budget line as X2 = YP2− P1
P2X1
The slope of the budget line is −P1P2
In our example −P1P2
= −2
Ann must give up 2 movies to get 1 pizza.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 16 / 28
![Page 118: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/118.jpg)
Budgets and Optimal Consumption
Aside: The Budget Line’s Slope
The budget constraints slope measures the amount of one good thatmust be sacrificed in order to buy more of another good
Remember that the budget line is:P1X1 + P2X2 = Y .
We can rewrite our budget line as X2 = YP2− P1
P2X1
The slope of the budget line is −P1P2
In our example −P1P2
= −2Ann must give up 2 movies to get 1 pizza.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 16 / 28
![Page 119: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/119.jpg)
The Optimal Consumption Choice
Combining the Budget Constraint and Preferences
If we combine information about preferences (marginal utility values)
with information about what is affordable (the budget constraint) wecan develop a useful rule to guide us to an individual‘sutility-maximizing choice:
The highest possible utility will be point for the consumers occurs whenthe marginal utility per dollar is the same for both goods
To see this, we first need to know Anne’s preferences towards movies.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 17 / 28
![Page 120: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/120.jpg)
The Optimal Consumption Choice
Combining the Budget Constraint and Preferences
If we combine information about preferences (marginal utility values)with information about what is affordable (the budget constraint)
wecan develop a useful rule to guide us to an individual‘sutility-maximizing choice:
The highest possible utility will be point for the consumers occurs whenthe marginal utility per dollar is the same for both goods
To see this, we first need to know Anne’s preferences towards movies.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 17 / 28
![Page 121: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/121.jpg)
The Optimal Consumption Choice
Combining the Budget Constraint and Preferences
If we combine information about preferences (marginal utility values)with information about what is affordable (the budget constraint) wecan develop a useful rule to guide us to an individual‘sutility-maximizing choice:
The highest possible utility will be point for the consumers occurs whenthe marginal utility per dollar is the same for both goods
To see this, we first need to know Anne’s preferences towards movies.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 17 / 28
![Page 122: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/122.jpg)
The Optimal Consumption Choice
Combining the Budget Constraint and Preferences
If we combine information about preferences (marginal utility values)with information about what is affordable (the budget constraint) wecan develop a useful rule to guide us to an individual‘sutility-maximizing choice:
The highest possible utility will be point for the consumers occurs whenthe marginal utility per dollar is the same for both goods
To see this, we first need to know Anne’s preferences towards movies.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 17 / 28
![Page 123: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/123.jpg)
The Optimal Consumption Choice
Anne’s Preferences Towards MoviesNumber of Movies Total Utility Marginal Utility
0 0
751 75
422 117
363 153
284 181
255 206
196 225
187 243
178 260
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 18 / 28
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The Optimal Consumption Choice
Anne’s Preferences Towards MoviesNumber of Movies Total Utility Marginal Utility
0 075
1 7542
2 11736
3 15328
4 18125
5 20619
6 22518
7 24317
8 260
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 18 / 28
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The Optimal Consumption Choice
Anne’s Preferences Towards MoviesNumber of Movies Total Utility Marginal Utility
0 075
1 75
422 117
363 153
284 181
255 206
196 225
187 243
178 260
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 18 / 28
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The Optimal Consumption Choice
Anne’s Preferences Towards MoviesNumber of Movies Total Utility Marginal Utility
0 075
1 7542
2 11736
3 15328
4 18125
5 20619
6 22518
7 24317
8 260
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 18 / 28
![Page 127: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/127.jpg)
The Optimal Consumption Choice
Anne’s Preferences Towards MoviesNumber of Movies Total Utility Marginal Utility
0 075
1 7542
2 117
363 153
284 181
255 206
196 225
187 243
178 260
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 18 / 28
![Page 128: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/128.jpg)
The Optimal Consumption Choice
Anne’s Preferences Towards MoviesNumber of Movies Total Utility Marginal Utility
0 075
1 7542
2 11736
3 15328
4 18125
5 20619
6 22518
7 24317
8 260
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 18 / 28
![Page 129: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/129.jpg)
The Optimal Consumption Choice
Putting the Pieces Together
Pizza Movies
Quantity Total Utility Quantity Total Utility(X1) from Pizza (X2) from Movies Total Utility
5 175 0 0 175
4 151 2 117 268
3 121 4 181 302
2 88 6 225 313
1 50 8 260 310
0 0 10 291 291
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 19 / 28
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The Optimal Consumption Choice
Putting the Pieces Together
Pizza Movies
Quantity Total Utility Quantity Total Utility(X1) from Pizza (X2) from Movies Total Utility
5 175
0 0 175
4 151 2 117 268
3 121 4 181 302
2 88 6 225 313
1 50 8 260 310
0 0 10 291 291
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 19 / 28
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The Optimal Consumption Choice
Putting the Pieces Together
Pizza Movies
Quantity Total Utility Quantity Total Utility(X1) from Pizza (X2) from Movies Total Utility
5 175 0 0
175
4 151 2 117 268
3 121 4 181 302
2 88 6 225 313
1 50 8 260 310
0 0 10 291 291
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 19 / 28
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The Optimal Consumption Choice
Putting the Pieces Together
Pizza Movies
Quantity Total Utility Quantity Total Utility(X1) from Pizza (X2) from Movies Total Utility
5 175 0 0 175
4 151 2 117 268
3 121 4 181 302
2 88 6 225 313
1 50 8 260 310
0 0 10 291 291
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 19 / 28
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The Optimal Consumption Choice
Putting the Pieces Together
Pizza Movies
Quantity Total Utility Quantity Total Utility(X1) from Pizza (X2) from Movies Total Utility
5 175 0 0 175
4 151
2 117 268
3 121 4 181 302
2 88 6 225 313
1 50 8 260 310
0 0 10 291 291
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 19 / 28
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The Optimal Consumption Choice
Putting the Pieces Together
Pizza Movies
Quantity Total Utility Quantity Total Utility(X1) from Pizza (X2) from Movies Total Utility
5 175 0 0 175
4 151 2 117
268
3 121 4 181 302
2 88 6 225 313
1 50 8 260 310
0 0 10 291 291
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 19 / 28
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The Optimal Consumption Choice
Putting the Pieces Together
Pizza Movies
Quantity Total Utility Quantity Total Utility(X1) from Pizza (X2) from Movies Total Utility
5 175 0 0 175
4 151 2 117 268
3 121 4 181 302
2 88 6 225 313
1 50 8 260 310
0 0 10 291 291
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 19 / 28
![Page 136: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/136.jpg)
The Optimal Consumption Choice
Putting the Pieces Together
Pizza Movies
Quantity Total Utility Quantity Total Utility(X1) from Pizza (X2) from Movies Total Utility
5 175 0 0 175
4 151 2 117 268
3 121 4 181 302
2 88 6 225 313
1 50 8 260 310
0 0 10 291 291
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 19 / 28
![Page 137: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/137.jpg)
The Optimal Consumption Choice
Putting the Pieces Together
Pizza Movies
Quantity Total Utility Quantity Total Utility(X1) from Pizza (X2) from Movies Total Utility
5 175 0 0 175
4 151 2 117 268
3 121 4 181 302
2 88 6 225 313
1 50 8 260 310
0 0 10 291 291
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 19 / 28
![Page 138: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/138.jpg)
The Optimal Consumption Choice
Putting the Pieces Together
Pizza Movies
Quantity Total Utility Quantity Total Utility(X1) from Pizza (X2) from Movies Total Utility
5 175 0 0 175
4 151 2 117 268
3 121 4 181 302
2 88 6 225 313
1 50 8 260 310
0 0 10 291 291
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 19 / 28
![Page 139: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/139.jpg)
The Optimal Consumption Choice
Putting the Pieces Together
Pizza Movies
Quantity Total Utility Quantity Total Utility(X1) from Pizza (X2) from Movies Total Utility
5 175 0 0 175
4 151 2 117 268
3 121 4 181 302
2 88 6 225 313
1 50 8 260 310
0 0 10 291 291
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 19 / 28
![Page 140: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/140.jpg)
The Optimal Consumption Choice
Putting the Pieces Together
Pizza Movies
Quantity Total Utility Quantity Total Utility(X1) from Pizza (X2) from Movies Total Utility
5 175 0 0 175
4 151 2 117 268
3 121 4 181 302
2 88 6 225 313
1 50 8 260 310
0 0 10 291 291
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 20 / 28
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Spending the Marginal Dollar
The Marginal Utility Per Dollar
The results on the previous slide shows us the optimal consumptionbundle for Anne
(i.e., the consumption bundle that maximizes hertotal utility given her budget constraint).
In moving down the table, consuming more movies and less pizza, twofactors factors affect her choices
1 As she moves down the table, she gains additional (i.e., marginalutility) from consuming more movies, but in order to do so she mustgive up the additional (i.e., marginal utility) from the pizza she forgoes.
2 How many additional movies she can see for each pizza she forgoesdepends on the relative prices of pizzas and movies.
A useful way of thinking about her problem is the notion of themarginal utility per dollar obtained from each good.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 21 / 28
![Page 142: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/142.jpg)
Spending the Marginal Dollar
The Marginal Utility Per Dollar
The results on the previous slide shows us the optimal consumptionbundle for Anne(i.e., the consumption bundle that maximizes hertotal utility given her budget constraint).
In moving down the table, consuming more movies and less pizza, twofactors factors affect her choices
1 As she moves down the table, she gains additional (i.e., marginalutility) from consuming more movies, but in order to do so she mustgive up the additional (i.e., marginal utility) from the pizza she forgoes.
2 How many additional movies she can see for each pizza she forgoesdepends on the relative prices of pizzas and movies.
A useful way of thinking about her problem is the notion of themarginal utility per dollar obtained from each good.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 21 / 28
![Page 143: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/143.jpg)
Spending the Marginal Dollar
The Marginal Utility Per Dollar
The results on the previous slide shows us the optimal consumptionbundle for Anne(i.e., the consumption bundle that maximizes hertotal utility given her budget constraint).
In moving down the table, consuming more movies and less pizza, twofactors factors affect her choices
1 As she moves down the table, she gains additional (i.e., marginalutility) from consuming more movies, but in order to do so she mustgive up the additional (i.e., marginal utility) from the pizza she forgoes.
2 How many additional movies she can see for each pizza she forgoesdepends on the relative prices of pizzas and movies.
A useful way of thinking about her problem is the notion of themarginal utility per dollar obtained from each good.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 21 / 28
![Page 144: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/144.jpg)
Spending the Marginal Dollar
The Marginal Utility Per Dollar
The results on the previous slide shows us the optimal consumptionbundle for Anne(i.e., the consumption bundle that maximizes hertotal utility given her budget constraint).
In moving down the table, consuming more movies and less pizza, twofactors factors affect her choices
1 As she moves down the table, she gains additional (i.e., marginalutility) from consuming more movies
, but in order to do so she mustgive up the additional (i.e., marginal utility) from the pizza she forgoes.
2 How many additional movies she can see for each pizza she forgoesdepends on the relative prices of pizzas and movies.
A useful way of thinking about her problem is the notion of themarginal utility per dollar obtained from each good.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 21 / 28
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Spending the Marginal Dollar
The Marginal Utility Per Dollar
The results on the previous slide shows us the optimal consumptionbundle for Anne(i.e., the consumption bundle that maximizes hertotal utility given her budget constraint).
In moving down the table, consuming more movies and less pizza, twofactors factors affect her choices
1 As she moves down the table, she gains additional (i.e., marginalutility) from consuming more movies, but in order to do so she mustgive up the additional (i.e., marginal utility) from the pizza she forgoes.
2 How many additional movies she can see for each pizza she forgoesdepends on the relative prices of pizzas and movies.
A useful way of thinking about her problem is the notion of themarginal utility per dollar obtained from each good.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 21 / 28
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Spending the Marginal Dollar
The Marginal Utility Per Dollar
The results on the previous slide shows us the optimal consumptionbundle for Anne(i.e., the consumption bundle that maximizes hertotal utility given her budget constraint).
In moving down the table, consuming more movies and less pizza, twofactors factors affect her choices
1 As she moves down the table, she gains additional (i.e., marginalutility) from consuming more movies, but in order to do so she mustgive up the additional (i.e., marginal utility) from the pizza she forgoes.
2 How many additional movies she can see for each pizza she forgoesdepends on the relative prices of pizzas and movies.
A useful way of thinking about her problem is the notion of themarginal utility per dollar obtained from each good.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 21 / 28
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Spending the Marginal Dollar
The Marginal Utility Per Dollar
The results on the previous slide shows us the optimal consumptionbundle for Anne(i.e., the consumption bundle that maximizes hertotal utility given her budget constraint).
In moving down the table, consuming more movies and less pizza, twofactors factors affect her choices
1 As she moves down the table, she gains additional (i.e., marginalutility) from consuming more movies, but in order to do so she mustgive up the additional (i.e., marginal utility) from the pizza she forgoes.
2 How many additional movies she can see for each pizza she forgoesdepends on the relative prices of pizzas and movies.
A useful way of thinking about her problem is the notion of themarginal utility per dollar obtained from each good.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 21 / 28
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Spending the Marginal Dollar
The Marginal Utility Per Dollar for MoviesNumber of Movies Marginal Utility MU/$
0
75 151
42 8.42
36 7.23
28 5.64
25 5.05
19 3.86
18 3.67
17 3.48
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 22 / 28
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Spending the Marginal Dollar
The Marginal Utility Per Dollar for MoviesNumber of Movies Marginal Utility MU/$
075 15
142 8.4
236 7.2
328 5.6
425 5.0
519 3.8
618 3.6
717 3.4
8
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Spending the Marginal Dollar
The Marginal Utility Per Dollar for MoviesNumber of Movies Marginal Utility MU/$
075 15
1
42 8.42
36 7.23
28 5.64
25 5.05
19 3.86
18 3.67
17 3.48
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 22 / 28
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Spending the Marginal Dollar
The Marginal Utility Per Dollar for MoviesNumber of Movies Marginal Utility MU/$
075 15
142 8.4
236 7.2
328 5.6
425 5.0
519 3.8
618 3.6
717 3.4
8
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 22 / 28
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Spending the Marginal Dollar
The Marginal Utility Per Dollar for MoviesNumber of Movies Marginal Utility MU/$
075 15
142 8.4
2
36 7.23
28 5.64
25 5.05
19 3.86
18 3.67
17 3.48
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 22 / 28
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Spending the Marginal Dollar
The Marginal Utility Per Dollar for MoviesNumber of Movies Marginal Utility MU/$
075 15
142 8.4
236 7.2
328 5.6
425 5.0
519 3.8
618 3.6
717 3.4
8
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 22 / 28
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Spending the Marginal Dollar
The Marginal Utility Per Dollar for MoviesNumber of Movies Marginal Utility MU/$
075 15
142 8.4
236 7.2
328 5.6
425 5.0
519 3.8
618 3.6
717 3.4
8
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 22 / 28
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Spending the Marginal Dollar
The Marginal Utility Per Dollar for Pizzas
Number of Pizza Marginal Utility MU/$0
50 5.01
38 3.82
33 3.33
29 2.94
25 2.55
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 23 / 28
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Spending the Marginal Dollar
Pizza ($10) Movies ($5)
Marginal MarginalQuantity Utility MU/$ Quantity Utility MU/$
5 25 2.5 0
4 29 2.9 2 42 8.1
3 33 3.3 4 28 5.6
2 38 3.8 6 19 3.8
1 50 5.0 8 17 3.4
0 10 15 3.0
Anne’s optimal consumption bundle occurs when the marginal utilityper dollar spent is the same for both goods.
This is known as the optimal consumption rule:
MU1
P1=
MU2
P2(2)
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 24 / 28
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Spending the Marginal Dollar
Pizza ($10) Movies ($5)
Marginal MarginalQuantity Utility MU/$ Quantity Utility MU/$
5 25 2.5 0
4 29 2.9 2 42 8.1
3 33 3.3 4 28 5.6
2 38 3.8 6 19 3.8
1 50 5.0 8 17 3.4
0 10 15 3.0
Anne’s optimal consumption bundle occurs when the marginal utilityper dollar spent is the same for both goods.
This is known as the optimal consumption rule:
MU1
P1=
MU2
P2(2)
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 24 / 28
![Page 158: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/158.jpg)
Spending the Marginal Dollar
Pizza ($10) Movies ($5)
Marginal MarginalQuantity Utility MU/$ Quantity Utility MU/$
5 25 2.5 0
4 29 2.9 2 42 8.1
3 33 3.3 4 28 5.6
2 38 3.8 6 19 3.8
1 50 5.0 8 17 3.4
0 10 15 3.0
Anne’s optimal consumption bundle occurs when the marginal utilityper dollar spent is the same for both goods.
This is known as the optimal consumption rule:
MU1
P1=
MU2
P2(2)
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 24 / 28
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Spending the Marginal Dollar
Pizza ($10) Movies ($5)
Marginal MarginalQuantity Utility MU/$ Quantity Utility MU/$
5 25 2.5 0
4 29 2.9 2 42 8.1
3 33 3.3 4 28 5.6
2 38 3.8 6 19 3.8
1 50 5.0 8 17 3.4
0 10 15 3.0
Anne’s optimal consumption bundle occurs when the marginal utilityper dollar spent is the same for both goods.
This is known as the optimal consumption rule:
MU1
P1=
MU2
P2(2)
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 24 / 28
![Page 160: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/160.jpg)
Spending the Marginal Dollar
Pizza ($10) Movies ($5)
Marginal MarginalQuantity Utility MU/$ Quantity Utility MU/$
5 25 2.5 0
4 29 2.9 2 42 8.1
3 33 3.3 4 28 5.6
2 38 3.8 6 19 3.8
1 50 5.0 8 17 3.4
0 10 15 3.0
Anne’s optimal consumption bundle occurs when the marginal utilityper dollar spent is the same for both goods.
This is known as the optimal consumption rule:
MU1
P1=
MU2
P2(2)
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 24 / 28
![Page 161: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/161.jpg)
Spending the Marginal Dollar
Pizza ($10) Movies ($5)
Marginal MarginalQuantity Utility MU/$ Quantity Utility MU/$
5 25 2.5 0
4 29 2.9 2 42 8.1
3 33 3.3 4 28 5.6
2 38 3.8 6 19 3.8
1 50 5.0 8 17 3.4
0 10 15 3.0
Anne’s optimal consumption bundle occurs when the marginal utilityper dollar spent is the same for both goods.
This is known as the optimal consumption rule:
MU1
P1=
MU2
P2(2)
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 24 / 28
![Page 162: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/162.jpg)
Spending the Marginal Dollar
Pizza ($10) Movies ($5)
Marginal MarginalQuantity Utility MU/$ Quantity Utility MU/$
5 25 2.5 0
4 29 2.9 2 42 8.1
3 33 3.3 4 28 5.6
2 38 3.8 6 19 3.8
1 50 5.0 8 17 3.4
0 10 15 3.0
Anne’s optimal consumption bundle occurs when the marginal utilityper dollar spent is the same for both goods.
This is known as the optimal consumption rule:
MU1
P1=
MU2
P2(2)
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 24 / 28
![Page 163: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/163.jpg)
Spending the Marginal Dollar
Pizza ($10) Movies ($5)
Marginal MarginalQuantity Utility MU/$ Quantity Utility MU/$
5 25 2.5 0
4 29 2.9 2 42 8.1
3 33 3.3 4 28 5.6
2 38 3.8 6 19 3.8
1 50 5.0 8 17 3.4
0 10 15 3.0
Anne’s optimal consumption bundle occurs when the marginal utilityper dollar spent is the same for both goods.
This is known as the optimal consumption rule:
MU1
P1=
MU2
P2(2)
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 24 / 28
![Page 164: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/164.jpg)
Spending the Marginal Dollar
Pizza ($10) Movies ($5)
Marginal MarginalQuantity Utility MU/$ Quantity Utility MU/$
5 25 2.5 0
4 29 2.9 2 42 8.1
3 33 3.3 4 28 5.6
2 38 3.8 6 19 3.8
1 50 5.0 8 17 3.4
0 10 15 3.0
Anne’s optimal consumption bundle occurs when the marginal utilityper dollar spent is the same for both goods.
This is known as the optimal consumption rule:
MU1
P1=
MU2
P2(2)
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 24 / 28
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Spending the Marginal Dollar
Graphically
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 25 / 28
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Spending the Marginal Dollar
Graphically
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 25 / 28
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Spending the Marginal Dollar
Graphically
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 25 / 28
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Spending the Marginal Dollar
Graphically
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 25 / 28
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From Utility to the Demand Curve
Marginal Utility and the Law of Demand
What happens to the optimal quantity demanded of a good as theprice increases?
We saw in earlier chapters that the quantity demanded decreases (theso-called law of demand comes into play).
We can see this same result using results of the current chapter.
- With an increase in price, the customer preferences (and MU’s) don’tchange.
- . . . but the marginal utility (i.e., MUi
Pi) per dollar does decline
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 26 / 28
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From Utility to the Demand Curve
Marginal Utility and the Law of Demand
What happens to the optimal quantity demanded of a good as theprice increases?
We saw in earlier chapters that the quantity demanded decreases (theso-called law of demand comes into play).
We can see this same result using results of the current chapter.
- With an increase in price, the customer preferences (and MU’s) don’tchange.
- . . . but the marginal utility (i.e., MUi
Pi) per dollar does decline
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 26 / 28
![Page 171: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/171.jpg)
From Utility to the Demand Curve
Marginal Utility and the Law of Demand
What happens to the optimal quantity demanded of a good as theprice increases?
We saw in earlier chapters that the quantity demanded decreases (theso-called law of demand comes into play).
We can see this same result using results of the current chapter.
- With an increase in price, the customer preferences (and MU’s) don’tchange.
- . . . but the marginal utility (i.e., MUi
Pi) per dollar does decline
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 26 / 28
![Page 172: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/172.jpg)
From Utility to the Demand Curve
Marginal Utility and the Law of Demand
What happens to the optimal quantity demanded of a good as theprice increases?
We saw in earlier chapters that the quantity demanded decreases (theso-called law of demand comes into play).
We can see this same result using results of the current chapter.
- With an increase in price, the customer preferences (and MU’s) don’tchange.
- . . . but the marginal utility (i.e., MUi
Pi) per dollar does decline
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 26 / 28
![Page 173: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/173.jpg)
From Utility to the Demand Curve
Marginal Utility and the Law of Demand
What happens to the optimal quantity demanded of a good as theprice increases?
We saw in earlier chapters that the quantity demanded decreases (theso-called law of demand comes into play).
We can see this same result using results of the current chapter.
- With an increase in price, the customer preferences (and MU’s) don’tchange.
- . . . but the marginal utility (i.e., MUi
Pi) per dollar does decline
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 26 / 28
![Page 174: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/174.jpg)
From Utility to the Demand Curve
Marginal Utility and DemandWhat happens to the quantity demand for good 2 as its price increases?
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 27 / 28
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From Utility to the Demand Curve
Marginal Utility and DemandWhat happens to the quantity demand for good 2 as its price increases?
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 27 / 28
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From Utility to the Demand Curve
Marginal Utility and DemandWhat happens to the quantity demand for good 2 as its price increases?
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 27 / 28
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From Utility to the Demand Curve
Marginal Utility and DemandWhat happens to the quantity demand for good 2 as its price increases?
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 27 / 28
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From Utility to the Demand Curve
Marginal Utility and DemandWhat happens to the quantity demand for good 2 as its price increases?
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 27 / 28
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From Utility to the Demand Curve
The Substitution and Income Effects
The previous slide illustrates the substitution effect
- As the price of good 2 increased, the individual substituted away fromgood
- Consuming more of good 1.- For example, in the case of Anne, an increase in the price of pizza
would cause her to substitute away from pizza and towards moremovies.
There is another consequence of a price change, known as the incomeeffect
- With a drop in price, the individual can purchase the same bundle ofgoods as they did before and have money left over.
- It is as if their income has gone up by the savings due to the pricedecrease.
- For most cases, this income effect is small.- However, for big ticket items (such as housing), the income effect of a
price reduction can be large.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 28 / 28
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From Utility to the Demand Curve
The Substitution and Income Effects
The previous slide illustrates the substitution effect
- As the price of good 2 increased, the individual substituted away fromgood
- Consuming more of good 1.- For example, in the case of Anne, an increase in the price of pizza
would cause her to substitute away from pizza and towards moremovies.
There is another consequence of a price change, known as the incomeeffect
- With a drop in price, the individual can purchase the same bundle ofgoods as they did before and have money left over.
- It is as if their income has gone up by the savings due to the pricedecrease.
- For most cases, this income effect is small.- However, for big ticket items (such as housing), the income effect of a
price reduction can be large.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 28 / 28
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From Utility to the Demand Curve
The Substitution and Income Effects
The previous slide illustrates the substitution effect
- As the price of good 2 increased, the individual substituted away fromgood
- Consuming more of good 1.
- For example, in the case of Anne, an increase in the price of pizzawould cause her to substitute away from pizza and towards moremovies.
There is another consequence of a price change, known as the incomeeffect
- With a drop in price, the individual can purchase the same bundle ofgoods as they did before and have money left over.
- It is as if their income has gone up by the savings due to the pricedecrease.
- For most cases, this income effect is small.- However, for big ticket items (such as housing), the income effect of a
price reduction can be large.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 28 / 28
![Page 182: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/182.jpg)
From Utility to the Demand Curve
The Substitution and Income Effects
The previous slide illustrates the substitution effect
- As the price of good 2 increased, the individual substituted away fromgood
- Consuming more of good 1.- For example, in the case of Anne, an increase in the price of pizza
would cause her to substitute away from pizza and towards moremovies.
There is another consequence of a price change, known as the incomeeffect
- With a drop in price, the individual can purchase the same bundle ofgoods as they did before and have money left over.
- It is as if their income has gone up by the savings due to the pricedecrease.
- For most cases, this income effect is small.- However, for big ticket items (such as housing), the income effect of a
price reduction can be large.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 28 / 28
![Page 183: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/183.jpg)
From Utility to the Demand Curve
The Substitution and Income Effects
The previous slide illustrates the substitution effect
- As the price of good 2 increased, the individual substituted away fromgood
- Consuming more of good 1.- For example, in the case of Anne, an increase in the price of pizza
would cause her to substitute away from pizza and towards moremovies.
There is another consequence of a price change, known as the incomeeffect
- With a drop in price, the individual can purchase the same bundle ofgoods as they did before and have money left over.
- It is as if their income has gone up by the savings due to the pricedecrease.
- For most cases, this income effect is small.- However, for big ticket items (such as housing), the income effect of a
price reduction can be large.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 28 / 28
![Page 184: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/184.jpg)
From Utility to the Demand Curve
The Substitution and Income Effects
The previous slide illustrates the substitution effect
- As the price of good 2 increased, the individual substituted away fromgood
- Consuming more of good 1.- For example, in the case of Anne, an increase in the price of pizza
would cause her to substitute away from pizza and towards moremovies.
There is another consequence of a price change, known as the incomeeffect
- With a drop in price, the individual can purchase the same bundle ofgoods as they did before and have money left over.
- It is as if their income has gone up by the savings due to the pricedecrease.
- For most cases, this income effect is small.- However, for big ticket items (such as housing), the income effect of a
price reduction can be large.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 28 / 28
![Page 185: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/185.jpg)
From Utility to the Demand Curve
The Substitution and Income Effects
The previous slide illustrates the substitution effect
- As the price of good 2 increased, the individual substituted away fromgood
- Consuming more of good 1.- For example, in the case of Anne, an increase in the price of pizza
would cause her to substitute away from pizza and towards moremovies.
There is another consequence of a price change, known as the incomeeffect
- With a drop in price, the individual can purchase the same bundle ofgoods as they did before and have money left over.
- It is as if their income has gone up by the savings due to the pricedecrease.
- For most cases, this income effect is small.- However, for big ticket items (such as housing), the income effect of a
price reduction can be large.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 28 / 28
![Page 186: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/186.jpg)
From Utility to the Demand Curve
The Substitution and Income Effects
The previous slide illustrates the substitution effect
- As the price of good 2 increased, the individual substituted away fromgood
- Consuming more of good 1.- For example, in the case of Anne, an increase in the price of pizza
would cause her to substitute away from pizza and towards moremovies.
There is another consequence of a price change, known as the incomeeffect
- With a drop in price, the individual can purchase the same bundle ofgoods as they did before and have money left over.
- It is as if their income has gone up by the savings due to the pricedecrease.
- For most cases, this income effect is small.
- However, for big ticket items (such as housing), the income effect of aprice reduction can be large.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 28 / 28
![Page 187: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/187.jpg)
From Utility to the Demand Curve
The Substitution and Income Effects
The previous slide illustrates the substitution effect
- As the price of good 2 increased, the individual substituted away fromgood
- Consuming more of good 1.- For example, in the case of Anne, an increase in the price of pizza
would cause her to substitute away from pizza and towards moremovies.
There is another consequence of a price change, known as the incomeeffect
- With a drop in price, the individual can purchase the same bundle ofgoods as they did before and have money left over.
- It is as if their income has gone up by the savings due to the pricedecrease.
- For most cases, this income effect is small.- However, for big ticket items (such as housing), the income effect of a
price reduction can be large.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 28 / 28
![Page 188: Econ 101: Principles of Microeconomics · The Rational Consumer One of the key assumptions underlying economics is the concept of the rational consumer; i.e., that individuals know](https://reader034.vdocuments.net/reader034/viewer/2022042110/5e8b7917a1ae215b8c1eda1c/html5/thumbnails/188.jpg)
From Utility to the Demand Curve
The Substitution and Income Effects
The previous slide illustrates the substitution effect
- As the price of good 2 increased, the individual substituted away fromgood
- Consuming more of good 1.- For example, in the case of Anne, an increase in the price of pizza
would cause her to substitute away from pizza and towards moremovies.
There is another consequence of a price change, known as the incomeeffect
- With a drop in price, the individual can purchase the same bundle ofgoods as they did before and have money left over.
- It is as if their income has gone up by the savings due to the pricedecrease.
- For most cases, this income effect is small.- However, for big ticket items (such as housing), the income effect of a
price reduction can be large.
Herriges (ISU) Chapter 10: The Rational Consumer Fall 2010 28 / 28