consumer choice and utility maximization 1. the law of diminishing “additional”...
TRANSCRIPT
Would you see the movie three times?Notice that the total benefit is more than the
total cost but you would NOT watch the movie the 3rd time.
Thinking at the Margin
# Times Watching Movie
Marginal Utility
Price
1st $30 $102nd $15 $10
3rd $5 $10Total $50 $30
Calculate Marginal Utility# of Slices of
PizzaTotal Utility
(in utils)Marginal
Utility/Benefit
0 0
1 8
2 14
3 19
4 23
5 25
6 26
7 26
8 24
How many pizzas would you buy if the price per slice was $2? 4
Calculate Marginal Utility# of Slices of
PizzaTotal Utility (in dollars)
Marginal Utility/Benefi
t
0 0 0
1 8 8
2 14 6
3 19 5
4 23 4
5 25 2
6 26 1
7 26 0
8 24 -2
How many pizzas would you buy if the price per slice was $2?
Marginal Cost
$2
$2
$2
$2
$2
$2
$2
$2
$2
5
Calculate Marginal Utility# of Slices of
PizzaTotal Utility (in dollars)
Marginal Utility/Benefi
t
0 0 0
1 8 8
2 14 6
3 19 5
4 23 4
5 25 2
6 26 1
7 26 0
8 24 -2
How many pizzas would you buy if the price per slice was $2?
Marginal Cost
2
2
2
2
2
2
2
2
2
You will continue to consume until
Marginal Benefit = Marginal Cost
6
CONSUMER BEHAVIOR
You plan to take a vacation and want to maximize your utility. Based on the info below, which should
you choose?
Destination Marginal Utility(In Utils)
Price
Tahiti 3000 $3,000
Chicago 1000 $500
Marginal Utility Per Dollar
1 Util
2 Utils
7
CONSUMER BEHAVIOR
You plan to take a vacation and want to maximize your utility. Based on the info below, which should
you choose?
Destination Marginal Utility(In Utils)
Price
Tahiti 3000 $3,000
Chicago 1000 $500
Marginal Utility Per Dollar
1 Util
2 Utils
Calculating Marginal Utility Per Dollar allows you to compare products with different prices.
8
If you only have $25, what combination of movies and go carts maximizes your utility?
Utility Maximization
# Times Going
Marginal Utility
(Movies)
MU/P(Price =$10)
Marginal Utility
(Go Carts)
MU/P(Price =$5)
1st 30 102nd 20 53rd 10 24th 5 1
$10 $5
If you only have $25, what combination of movies and go carts maximizes your utility?
Utility Maximization
# Times Going
Marginal Utility
(Movies)
MU/P(Price =$10)
Marginal Utility
(Go Carts)
MU/P(Price =$5)
1st 30 3 10 $22nd 20 $2 5 $13rd 10 $1 2 $.404th 5 $.50 1 $.20
$10 $5
If you only have $25, what combination of movies and go carts maximizes your utility?
Utility Maximization
# Times Going
Marginal Utility
(Movies)
MU/P(Price =$10)
Marginal Utility
(Go Carts)
MU/P(Price =$5)
1st 30 3 10 22nd 20 $2 5 $13rd 10 $1 2 $.404th 5 $.50 1 $.20
$10 $5
If you only have $25, what combination of movies and go carts maximizes your utility?
Utility Maximization
# Times Going
Marginal Utility
(Movies)
MU/P(Price =$10)
Marginal Utility
(Go Carts)
MU/P(Price =$5)
1st 30 3 10 22nd 20 2 5 13rd 10 1 2 .404th 5 .50 1 .20
$10 $5
Production SimulationOverview• The class will be divided into two firms. • There will be several rounds in which each firm will produce chains out
of paper. • Each round last exactly 2 minutes • Each firm is going to hire one more worker at the start of each round. Resources• 1 stapler, 1 scissors, 1 table, and plenty of staples and paper Rules• Workers cannot stockpile slips of paper. No extras • Workers cannot cut more than one paper at a time • Workers can only add links to one side of the chain• Each link must pass inspection• If links don’t meet specifications they won’t countResponsibilities• The manager will hire the workers.• The inspector will check to make sure each product is made to
specifications
Production Simulation
Step 1: Cut paper down the middle
into two piece
Step 2: Fold piece down the middle
Step 3: Wrap ends around and staple
Step 4: Add more links to one end
Complete the chart for your firm:
Production Simulation
Number of Workers (inputs)
Total Product (output)
Marginal Product
0
1
2
3
4
5
6
Simulation DebriefKey Questions: 1. What happened to the number on links
produced as more workers were hired?2. Why can the second worker generate more
additional links than one worker working alone?
3. Why did the additional output for each worker eventually start to fall or even go negative?
4. What would happen to total output if every student in the room tried to make links given the limited resources?
Simulation Debrief
Fixed Resources-Resources that DON’T change with the amount producedEx: Stapler, scissors, and table
Variable Resources-Resources that DO change as more or less is producedEx: Workers, paper, and staples
Simulation Debrief
Marginal Product =Change in Total Product
Change in Inputs
•Marginal Product (MP)- the additional output generated by additional inputs (workers).
•Total Physical Product (TP)- total output or quantity produced
•Average Product (AP)- the output per unit of input
Average Product =Total Product
Units of Labor
Production Analysis•What happens to the Total Product as you hire more workers?•What happens to marginal product as you hire more workers?•Why does this happens?
The Law of Diminishing Marginal ReturnsAs variable resources (workers) are added to fixed resources (machinery, tool, etc.), the
additional output produced from each new worker will eventually fall.
Too many cooks in the kitchen!