Utility Maximization

Utility Maximization

The process of obtaining the greatest level of overall satisfaction or happiness from consuming goods and services, subject to consumers' preferences, incomes, and prices.

marginal utility is decreasing when more units are consumed

as long as marginal utility is positive, total utility will increase when another unit is consumed.

Utility Maximization

assumes that consumers attempt to get to max total utility possible out of their limited incomes

marginal utility formula

change in total utility/change in quantity

utility maximization helps explain the substitution effect that is noted when explaining the law of ----.

demand

to calculate marginal utility per dollar:

divide each marginal utility values by price of the product.

utility maximization implies purchasing goods/ services until their marginal utilities per ------ are equal

dollar

systematically thinking about benefits associated with the consumptions of goods and services can:

help consumers make better decisions

Utility Maximization assumptions

rational behavior, ranked preferences, limited incomes, price

the util is ---- in nature

subjective

marginal utility

the extra usefulness or satisfaction a person gets from acquiring or using one more unit of a product

equal marginal principle

the idea that consumers maximize their utility when they allocate their limited incomes so that the marginal utility per dollar spent on each of their final choices in a bundle is equal

law of diminishing marginal utility

the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time

total utility

the total amount of satisfaction obtained from consumption of a good or service

allocate

to set apart or designate for a special purpose; to distribute

what unit do economists use to measure utility in?

util