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Chapter 3 The Behavior of Consumers

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Chapter 3 The Behavior of Consumers Powered By Docstoc
					   Utility maximization

 The goal of the consumer is to
maximize utility given the budget
 constraint. Let’s see what that
             means.

                                    1
                                    Utility Maximization

 The individual would like to get to the
  highest indifference curve possible, but the
  budget constraint restricts the individual’s
  options to the budget line.
 On the next slide let’s see what is the best the
  individual can do. But, before we do
  remember 1) indifference curves summarize
  how consumers are willing to trade off good
  x for y, and 2) the budget line shows how the
  consumer can trade off good x for good y.


                                                           2
y                                       Utility Maximization


                                 Because of the budget
c        a       u3              line u3 can not be
                                 reached
                 u2
             b        u1
                                 u1 can be reached at
                                 points c and b, but even
                           x     more utility would be
                                 obtained if the individual
                                 went to point a on u2.

The utility associated with u2 is the maximum this
person
can achieve given their income and the prices they face.
                                                               3
  y                                     Utility Maximization




               b

                             x
Note why b from the previous screen was not the best
point. To give up a unit of x and maintain the same
utility the person needed to get back a certain amount of
y. But the market actually gives back more y
than the individual requires. This trade is beneficial.
The individual would thus give up the unit of x
and be happier for the trade.

                                                               4
 y                                       Utility Maximization
            c




                             x
Note why c from two screens ago was not the best
point. To take a unit of x and maintain the same
utility the person is willing to give up a certain amount of
y. But the market actually requires the individual
to give up less. This is a beneficial trade. The individual
would thus take the unit of x and be happier for the
trade.

                                                                5
                                       Utility Maximization




d


    a     b
    c
In the final analysis, the individual maximizes utility
when the indifference curve is tangent to the budget line.

Tangent means equal slopes.




                                                              6

				
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posted:9/4/2012
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