<< Chapter < Page Chapter >> Page >

To understand this point, think back to the step-by-step process of finding the choice with highest total utility by comparing the marginal utility that is gained and lost from different choices along the budget constraint. As José compares each choice along his budget constraint to the previous choice, what matters is not the specific numbers that he places on his utility—or whether he uses any numbers at all—but only that he personally can identify which choices he prefers.

In this way, the step-by-step process of choosing the highest level of utility resembles rather closely how many people make consumption decisions. We think about what will make us the happiest; we think about what things cost; we think about buying a little more of one item and giving up a little of something else; we choose what provides us with the greatest level of satisfaction. The vocabulary of comparing the points along a budget constraint and total and marginal utility is just a set of tools for discussing this everyday process in a clear and specific manner. It is welcome news that specific utility numbers are not central to the argument, since a good utilimometer is hard to find. Do not worry—while we cannot measure utils, by the end of the next module, we will have transformed our analysis into something we can measure—demand.

Key concepts and summary

Economic analysis of household behavior is based on the assumption that people seek the highest level of utility or satisfaction. Individuals are the only judge of their own utility. In general, greater consumption of a good brings higher total utility. However, the additional utility received from each unit of greater consumption tends to decline in a pattern of diminishing marginal utility.

The utility-maximizing choice on a consumption budget constraint can be found in several ways. You can add up total utility of each choice on the budget line and choose the highest total. You can choose a starting point at random and compare the marginal utility gains and losses of moving to neighboring points—and thus eventually seek out the preferred choice. Alternatively, you can compare the ratio of the marginal utility to price of good 1 with the marginal utility to price of good 2 and apply the rule that at the optimal choice, the two ratios should be equal:

MU 1 P 1 = MU 2 P 2

Problems

Praxilla, who lived in ancient Greece, derives utility from reading poems and from eating cucumbers. Praxilla gets 30 units of marginal utility from her first poem, 27 units of marginal utility from her second poem, 24 units of marginal utility from her third poem, and so on, with marginal utility declining by three units for each additional poem. Praxilla gets six units of marginal utility for each of her first three cucumbers consumed, five units of marginal utility for each of her next three cucumbers consumed, four units of marginal utility for each of the following three cucumbers consumed, and so on, with marginal utility declining by one for every three cucumbers consumed. A poem costs three bronze coins but a cucumber costs only one bronze coin. Praxilla has 18 bronze coins. Sketch Praxilla’s budget set between poems and cucumbers, placing poems on the vertical axis and cucumbers on the horizontal axis. Start off with the choice of zero poems and 18 cucumbers, and calculate the changes in marginal utility of moving along the budget line to the next choice of one poem and 15 cucumbers. Using this step-by-step process based on marginal utility, create a table and identify Praxilla’s utility-maximizing choice. Compare the marginal utility of the two goods and the relative prices at the optimal choice to see if the expected relationship holds. Hint : Label the table columns: 1) Choice, 2) Marginal Gain from More Poems, 3) Marginal Loss from Fewer Cucumbers, 4) Overall Gain or Loss, 5) Is the previous choice optimal? Label the table rows: 1) 0 Poems and 18 Cucumbers, 2) 1 Poem and 15 Cucumbers, 3) 2 Poems and 12 Cucumbers, 4) 3 Poems and 9 Cucumbers, 5) 4 Poems and 6 Cucumbers, 6) 5 Poems and 3 Cucumbers, 7) 6 Poems and 0 Cucumbers.

Got questions? Get instant answers now!

References

U.S. Bureau of Labor Statistics. 2015. “Consumer Expenditures in 2013.” Accessed March 11, 2015. http://www.bls.gov/cex/csxann13.pdf.

U.S. Bureau of Labor Statistics. 2015. “Employer Costs for Employee Compensation—December 2014.” Accessed March 11, 2015. http://www.bls.gov/news.release/pdf/ecec.pdf.

U.S. Bureau of Labor Statistics. 2015. “Labor Force Statistics from the Current Population Survey.” Accessed March 11, 2015. http://www.bls.gov/cps/cpsaat22.htm.

Questions & Answers

summarize halerambos & holbon
David Reply
the Three stages of Auguste Comte
Clementina Reply
what are agents of socialization
Antonio Reply
sociology of education
Nuhu Reply
definition of sociology of education
Nuhu
what is culture
Abdulrahim Reply
shared beliefs, values, and practices
AI-Robot
What are the two type of scientific method
ogunniran Reply
I'm willing to join you
Aceng Reply
what are the scientific method of sociology
Man
what is socialization
ogunniran Reply
the process wherein people come to understand societal norms and expectations, to accept society's beliefs, and to be aware of societal values
AI-Robot
scientific method in doing research
ogunniran
defimition of sickness in afica
Anita
Cosmology
ogunniran
Hmmm
ogunniran
list and explain the terms that found in society
REMMY Reply
list and explain the terms that found in society
Mukhtar
what are the agents of socialization
Antonio
Family Peer group Institution
Abdulwajud
I mean the definition
Antonio
ways of perceived deviance indifferent society
Naomi Reply
reasons of joining groups
SAM
to bring development to the nation at large
Hyellafiya
entails of consultative and consensus building from others
Gadama
World first Sociologist?
Abu
What is evolutionary model
Muhammad Reply
Evolution models refer to mathematical and computational representations of the processes involved in biological evolution. These models aim to simulate and understand how species change over time through mechanisms such as natural selection, genetic drift, and mutation. Evolutionary models can be u
faruk
what are the modern trends in religious behaviours
Selekeye Reply
what are social norms
Daniel Reply
shared standards of acceptable behavior by the group or appropriate behavior in a particular institution or those behaviors that are acceptable in a society
Lucius
that is how i understood it
Lucius
examples of societal norms
Diamond
Discuss the characteristics of the research located within positivist and the interpretivist paradigm
Tariro Reply
what is Industrialisation
Selekeye Reply
industrialization
Angelo
Got questions? Join the online conversation and get instant answers!
Jobilize.com Reply

Get Jobilize Job Search Mobile App in your pocket Now!

Get it on Google Play Download on the App Store Now




Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
Google Play and the Google Play logo are trademarks of Google Inc.

Notification Switch

Would you like to follow the 'Principles of economics' conversation and receive update notifications?

Ask