ECO 2023: Utility Maximization

Slope of a budget line

-Px/Py

Engel's Curve

A line which connects points of equilibrium consumption points, as consumers income changes and relative prices held constant

Under the Ordinal Approach to Utility, it is assumed that...

A rational consumer can profess preference for a product or service or declare indifference between two products

Total Utility Maximization

A rational consumer maximizes her total utility by ensuring that marginal utility per dollar is the same for all good consumed

Law of diminishing marginal utility

As more units of a product are consumed, the additional satisfaction from additional units consumed (MU) declines

Budget Constraint

The consumers max total disposable income (after taxes and such)

Indifference Curves can intersect with each other

False

For a multi-commodity world, total utility is maxed based on the following rule of thumb

If price falls, marginal utility per $ increases (Law of Demand)

An indifference map shows

Multiple curves of multiple combinations because Indifference are everywhere dense in the commodity space

Ordinal Approach

Ranking commodities in order of preferences to show utility (indifference curve is used)

Marginal Utility

The change in total utility due to a change in quantity consumed by one more unit

Price-consumption line

The line which connects points of equilibrium consumption as price of one of the commodities changes and relative DI held constant

Under the ordinal approach, a rational consumer maxes his total utility or is in equilibrium at what point?

The point of tangency b/w an indifference curve and a budget line

Total Utility

The total satisfaction expected to be derived from consuming a certain quantity of a products

Why individuals or households make decisions (cardinal thought)

They have limited income and have to choose which of their money wants to satisfy

Marginal Utility is the slope to what graph? The rate at which ___ changes

Total utility curve

Every product has characteristics that enables it to have close substitutes

True

Value in exchange

What determines value is the marginal utility (Diamond)

Value in Use

What determines value is the total utility of a product (Water)

Indifference Curve

a curve in a commodity space that shows different combinations of two goods, which give the same level of satisfaction or utility

Individuals make rational decisions when they make their consumption decision to satisfy this equation

benefit > cost

Cardinal Approach

expresses utility using a numerical value (utils) to quantify utility

Marginal Rate of Substitution (MRS)

the rate at which one commodity is exchanged for another along an indifference curve (the slope of the curve)

Utility

the satisfaction the consumer expects to derive from consuming a product of service