Utility Maximizing Rule

Assumptions:

Consumers will try to get the most value for their money.

Consumers’ income are limited. (Face Budget Constraint)

Consumers have clear preferences for various goods and services, they know their MU

Consumers can choose alternative goods.

Utility Maximizing Rule:

Maximum is reached when MU gained from the last money spent is equal across all goods and services purchased.

Last money spent on each product purchased yields the same amount of extra MU

Formula:

U(X,Y; Ceteris Paribus) = U(X,U; other things)

MU of product X / price of product X =

MU of product Y/ Price of product Y

SampleGood X(Price= 1Php) Good Y (Price = 2Php)

Quantity

MU MU/P TL UTILITY

Quantity

MU MU/P TL UTILITY

1 8 8 8 1 10 5 10

2 7 7 15 2 8 4 18

3 6 6 21 3 6 3 24

4 5 5 26 4 4 2 28

5 4 4 30 5 3 1.5 31

6 3 3 33 6 2 1 33

7 2 2 35 7 1 0.5 34

MUx / Px = MUy / Py

X(Price 1Php)

Y(Price 2Php) MU/P

A 5/1 10/2 5

B 4/1 8/2 4

C 3/1 6/2 3

D 2/1 4/2 2

INCOME:    UTILITY SUM  

A: X=4, Y=1, $1x4+$2x1 = $6 26+10=36

B: X=5, Y=2, $1x5+$2x2 = $9 30+18=48

C: X=6, Y=3, $1x6+$2x3 = $12 33+24=57

D: X=7, Y=4, $1x7+$2x4 = $15 35+28=63

Analysis:

As the income increases, total utility increases also. Therefore, higher income groups in our society usually enjoys more products and have higher total utility levels.

Indifference Curve:

- An indifference curve is a curve that shows all combinations of goods that provide the same level of utility.

X Y

2 6

3 4

4 3

6 2

3 3

4 4

Point:

A= A,B,C,D= Equally Happy

F= Very E= Less Goods

Arigatou