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Maximizing Utility: Making Decisions for Satisfaction

Learn how to make decisions based on utility and maximize your satisfaction. Understand the concept of diminishing marginal utility and calculate marginal and total utility. Discover how to make purchasing decisions based on utility per dollar spent. Examples are provided for various decision-making scenarios.

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Maximizing Utility: Making Decisions for Satisfaction

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  1. How do you decide whether to order shrimp, steak, chicken, pasta, sweat and sour pork, or fajitas? How do you decide whether to go bowling, roller skating, to a night club, to the theater, to to a community social, or to stay home and rent videos? How do you decide whether to purchase a red, green, blue, teal, white, black, or purple car or truck or motorcycle?

  2. You decide based on the Utilityyou will receive from each. • Utility: Means Satisfaction • A measure of the satisfaction received from possessing or consuming products. • We make decisions based on what will maximize our satisfaction. What will provide us the greatest utility.

  3. Definitions regarding Utility • Diminishing Marginal Utility: the concept that the more of one item consumed, ceteris paribus, at some point we will receive less satisfaction (utility) from each additional unit. • Marginal: means Additional • Marginal Utility: means Additional satisfaction. Calculated: Change in total utility divided by quantity.

  4. More Utility Definitions • Total Utility: Total satisfactions derived from consuming a quantity of some good or service. • Disutility: Dissatisfaction. Where marginal utility becomes negative. Disutility

  5. Following is an example for Utilities

  6. You are at an all you can eat buffet. You just spent $8.95 for the evening buffet, which includes a hot bar, a cold bar and a dessert bar. As you eat your first round of food, it tastes pretty good. You decide to go back for a second round of food. As you eat the second round, it tastes even better than the first ( you received greater satisfaction from round two than round one). You are now eating your third round and are starting to get full. But you continue to eat a fourth round, so you can get your monies worth. As you now eat your fifth round of food, you unbuckle your belt, loosen your pants and head for the dessert bar. (You must get your monies worth.) After eating dessert, you begin to feel sick.

  7. means change in TU Marginal Total (# of plates) MU = Q Quantity Utility Utility 1 5 2 12 7 12 - 5 7 = = 3 17 2 - 1 1 4 20 7 5 18

  8. TU Marginal Total (# of plates) MU = Q Quantity Utility Utility 1 5 2 12 7 17 - 12 5 = = 3 17 5 3 - 2 1 4 20 5 5 18

  9. You try the next one. Marginal Total (# of plates) Quantity Utility Utility 1 5 2 12 7 3 17 5 4 ? 20 5 18

  10. Marginal Total (# of plates) Quantity Utility Utility 1 5 2 12 7 20 - 17 3 = = 3 17 5 4 - 3 1 4 3 20 3 5 18

  11. Marginal Total (# of plates) Quantity Utility Utility 1 5 2 12 7 18 - 20 -2 = = 3 17 5 5 - 4 1 4 3 20 -2 5 18 -2

  12. Buffet dinner Marginal Additional satisfaction from the second plate is 7 utils. Total (# of plates) Quantity Utility Utility 1 5 2 12 7 3 17 5 Diminishing Marginal Utility set in with plate number 3. 4 20 3 5 18 -2 Disutility set in with plate number 5. You are sick.

  13. Marginal Utility per dollar • We make purchasing decisions based on the satisfaction we will receive from each additional unit consumed for each dollar spent. • You are at a nice restaurant. You are not sure what you want to eat. Maybe you’ll have the steak dinner, maybe the shrimp dinner, or maybe a chicken dinner.

  14. You then decide that you either want steak or shrimp. The steak you prefer costs $4 more than the shrimp. • Now your mind really begins to work. You must determine if the steak will satisfy you at least 4 times more than the shrimp will satisfy you. If it will, you order the steak. If not, you order the shrimp. • After you tell the server that you want the shrimp (or steak) you have even more decisions to make.

  15. Each entree is served with your choice of potato (baked, twice baked, or new), your choice of salad (tossed or ceaser), and your choice of vegetable ( green beans, corn, or spinich). • The dollars spent do not increase based on the choices above. • Because the dollar expenditure does not change, your decision is based solely on which items will provide you the greatest utility (satisfaction) when consumed.

  16. Decision Making • Although most of my examples are based on food, the same process is involved for every decision you make. • Examples: Where to go on vacation, which vehicle to purchase, which computer sysem to buy, all depends on the satisfaction you will receive for the dollars spent.

  17. This concludes the presentation for Chapter 7. Please open Unit 3 Chapter 8

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