Unit 2.2.

1 Theory of Consumer Behavior

Unit 2.2.1 - Consumer Behavior and Utility Maximization

AP only unit - Unit Overview

2.2.1 Theory of consumer choice (AP only)

• Total utility and marginal utility

• Utility maximization: equalizing marginal utility per dollar
• Individual and market demand curves
• Income and substitution effects

Blog posts: "Utility"

Blog posts: "Utility Maximization"

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Unit 2.2.1 Theory of Consumer Behavior

Unit 2.2.1 - Consumer Behavior and Utility Maximization

AP only unit

Quickwrite:

Fill your shopping cart with all the goods

and services you plan to buy in the next
two months, including quantities.

1. What factors determine the items you

placed in your cart?

2. Why does your cart contain different

items than the person sitting next to you?

3. If your income were to change in the

next six months, would your cart contain
different items? Why or why not?

4. If the price of some of the goods in your

cart were to change, would the contents of
your cart change? Why or why not?

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Unit 2.2.1 Theory of Consumer Behavior

Consumer Behavior and Utility Maximization

AP only unit

Mr. Welker at Haagen Daaz

Definitions:

Law of Diminishing Marginal 60

Total utility
Utility: As successive units of a 40
particular good are consumed, the
additional utility to the consumer 20
declines.
10
Total utility vs. marginal utility:
Total utility will increase until 1 2 3 4 5
marginal utility = zero, at which Scoops of ice cream

Marginal utility
10
point additional consumption will 8
result in a decline in total utility 6
4
2
• With partners, study graphs and 0
-2 1 2 3 4 5
answer questions on p. 361
Scoops of ice cream

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Unit 2.2.1 Theory of Consumer Behavior

Consumer Behavior and Utility Maximization

AP only unit

An economic explanation for how different consumers allocate their

money income among different goods and services:

• rational behavior:
Consumers try to get the "most for their money" to maximize their total utility

• preferences:
Consumers have clear cut preferences and can determine how much marginal
utility they get from consuming more units of a product
• budget constraint:
All consumers face a budget constraint, therefore must make decisions about what they
buy based on their limited budget
• prices:
Every product has a price, so consumers must weigh their purchasing decisions based
on their marginal utility from consumption and the price of the goods they consume

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Unit 2.2.1 Theory of Consumer Behavior

Consumer Behavior and Utility Maximization

AP only unit

Utility Maximization Rule:

Interpretation: If a consumer gets
more MU/$ for good A than good B,

MUA MUB he should consumer more of A and

less of B. As he consumes more A MUA
= will decrease. As he consumes less of
PA PB good B MUB will increase. When
MUA/PA and MUB/PB are equal, the
consumer is consuming just the right
amount of A and B.
Utility Maximization Rule:
to maximize satisfaction, a consumer should allocate his or her
money income so that the last dollar spent on each product yields
the same amount of extra utility. Marginal Utility per $ should be
equal for each product you buy!

Practice Utility Maximation Rule: Rainbow book Activity 11

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Unit 2.2.1 Theory of Consumer Behavior

Consumer Behavior and Utility Maximization

AP only unit

Robotrons Widgets

Quantity Total Utility Quantity Total Utility

0 0 0 0
1 16 1 24
2 28 2 44
3 36 3 56
4 40 4 64
5 42 5 68

Assume that robotrons cost $4 each, widgets cost $8 each, and the consumer spends his entire income of
$36 on robotrons and widgets.

• Identify the combination of robotrons and widgets the consumer will purchase. Explain your reasoning.

• With the prices of robotrons and widgets remaining constant, assume that the consumer’s income
increases to $60. Identify each of the following.
>>The new combination of robotrons and widgets the consumer will purchase.
>>The total utility the consumer will enjoy with this combination

• With income remaining at $60, assume the price of widgets increases to $16 each. Identify each of the
following.
>>The combination of robotrons and widgets the consumer will purchase
>>The consumer's total utility at this combination

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Unit 2.2.1 Theory of Consumer Behavior

Consumer Behavior and Utility Maximization

AP only unit

Budget: $36
Robotrons Widgets
Quantity Total Utility MUR MUR/PR Quantity Total Utility MUW MUW/PW
0 0 0 0
1 16 1 24
2 28 2 44
3 36 3 56
4 40 4 64
5 42 5 68

The Utility Maximization Rule: The consumer should allocate his/her resources
(money income) so that the last dollar spent on each product yields the same amount
of extra, marginal utility.

in other words... With each buying decision you make, you should maximize your MU/
$ until your budget is gone, then you will have reached "consumer nirvana" -
balance, harmony, total utility maximization!

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Attachments

APMicroUnit2.jnt