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Utility Maximization: The Rational Consumer

Learn about measuring utility, consumption bundles, marginal utility, and budget constraints in Chapter 10 of your notes packet. Discover how to optimize consumption for happiness within a given budget.

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Utility Maximization: The Rational Consumer

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  1. Warm-Up • Complete the warm-up problem in your notes packet

  2. Utility Maximization Chapter 10: The Rational Consumer (pages 250-263)

  3. What is Happiness? • Measure someone’s UTILITY • Uses units known as UTILS • Everything we buy has utility • Everything you buy makes up your CONSUMPTION BUNDLE

  4. Consumption Bundle Diminishing Marginal Utility

  5. Budget Constraint • Purchases limited by budget • BUDGET LINE shows all possible combinations • Creates CONSUMPTION POSSBILITIES CURVE

  6. Budget Constraint • Assumptions • Income = $50 • Notebooks = $5 • CDs = $10 Combination not possible

  7. Optimum Consumption • Maximize utility given budget constraint • Done through marginal analysis • Look to marginal utility per dollar

  8. Optimum Consumption MUX/PX = MUY/PY

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