3. A Rule for Maximizing Utility - Saylor Academy

A RULE FOR MAXIMIZING UTILITY ... If a consumer wants to maximize total utility, for every dollar that they spend, they should spend it on the item which yields ... Skiptomaincontent Sidepanel Courses Programs Help GettingStarted DiscussionForums HelpCenter&FAQ LoginorSignup Courses Programs Help GettingStarted DiscussionForums HelpCenter&FAQ ECON101:PrinciplesofMicroeconomics Sections CourseIntroduction Unit1:IntroductiontoEconomics Unit2:SupplyandDemand Unit3:MarketsandIndividualMaximizingBehavior Unit4:TheConsumer Unit5:TheProducer Unit6:MarketStructure:CompetitiveandNon-CompetitiveMarkets Unit7:PublicFinance,PublicChoice,andtheEnvironment StudyGuide CourseFeedbackSurvey CertificateFinalExam SaylorDirectCredit Resources Activities Quizzes Home Myprograms AboutSaylorAcademy Blog CreditUniversityPartners RulesforMaximizingUtility Markascompleted Readthisarticletolearnmoreabouthowtocalculatemarginalutilityperdollar.Makesuretoanswerthe"TryIt"questions.3.ARuleforMaximizingUtilityThisprocessofdecisionmakingdescribedpreviouslysuggestsaruletofollowwhenmaximizingutility.SincethepriceofT-shirtsisnotthesameasthepriceofmovies,it'snotenoughtojustcomparethemarginalutilityofT-shirtswiththemarginalutilityofmovies.Instead,weneedtocontrolforthepricesofeachproduct.Wecandothisbycomputingandcomparingmarginalutilityperdollarofexpenditureforeachproduct.MarginalutilityperdollaristheamountofadditionalutilityJoséreceivesgiventhepriceoftheproduct. ForJosé'sT-shirtsandmovies,themarginalutilityperdollarisshowninTable2. Table2.MarginalUtilityperDollar QuantityofT-Shirts TotalUtility MarginalUtility MarginalUtilityperDollar QuantityofMovies TotalUtility MarginalUtility MarginalUtilityperDollar 1 22 22 22/$14=1.6 1 16 16 16/$7=2.3 2 43 21 21/$14=1.5 2 31 15 15/$7=2.14 3 63 20 20/$14=1.4 3 45 14 14/$7=2 4 81 18 18/$14=1.3 4 58 13 13/$7=1.9 5 97 16 16/$14=1.1 5 70 12 12/$7=1.7 6 111 14 14/$14=1 6 81 11 11/$7=1.6 7 123 12 12/$14=1.2 7 91 10 10/$7=1.4 ARULEFORMAXIMIZINGUTILITY Ifaconsumerwantstomaximizetotalutility,foreverydollarthattheyspend,theyshouldspenditontheitemwhichyieldsthegreatestmarginalutilityperdollarofexpenditure. Markascompleted Previous Jumpto... Jumpto... CourseSyllabus WhatIsEconomics?WhyIsItImportant? DefiningEconomics HowIndividualsMakeChoicesBasedonTheirBudgetConstraints EconomicProblem:ScarceResources ScarcityandChoice SettingGlobalPriorities TheFieldofEconomics ModelsandTheories MarginalAnalysis TheEconomists'ToolKit SolvingSimpleEquations GraphfromSlope-InterceptEquation EconomicModels FactorsofProductionandtheProductionPossibilitiesCurve ProductionPossibilitiesFrontier OpportunityCost IncreasingOpportunityCost AllocativeEfficiencyandMarginalBenefit EconomicGrowththroughInvestment ComparativeAdvantageSpecializationandGainsfromTrade AbsoluteandComparativeAdvantage MoreonComparativeAdvantageandAbsoluteAdvantage AnalyzingAdvantageDataTablesandGraphs AFinalNoteonAbsoluteandComparativeAdvantage CeterisParibus Demand FactorsAffectingDemand LawofDemand PriceofRelatedProductsandDemand ChangesinIncome,Population,orPreferences NormalandInferiorGoods InferiorGoodsClarification Supply FactorsAffectingSupply LawofSupply MoreonFactorsAffectingSupply Demand,Supply,andEquilibrium MarketEquilibrium ChangesinMarketEquilibrium PuttingDemandandSupplytoWork ChangesinSupplyandDemand IntroducingSupplyandDemand GovernmentInterventioninMarketPrices:PriceFloorsandPriceCeilings PriceCeilingsandPriceFloors Demand,Supply,andEfficiency InefficiencyofPriceFloorsandPriceCeilings MinimumWageandPriceFloors Elasticity:AMeasureofResponse IntroductiontoElasticity CalculatingElasticity DefiningPriceElasticityofDemand PriceElasticityofDemand MoreonElasticityofDemand ConstantUnitElasticity TotalRevenueandElasticity MoreonTotalRevenueandElasticity CrossElasticityofDemand ElasticityofSupply ElasticityandStrangePercentChanges CalculatingElasticityandPercentageChanges TaxesandPerfectlyInelasticDemand TaxesandPerfectlyElasticDemand TheLogicofMaximizingBehaviorandMaximizingintheMarketplace ConsumerandProducerSurplus ConsumerSurplusIntroduction DemandCurveasMarginalBenefitCurve TotalConsumerSurplusasArea ProducerSurplus HowMuchtoProduce?TheStoryofMarginalRevenueandMarginalCosts MarketFailure PositiveExternalitiesandPublicGoods PositiveExternalities RentControlandDeadweightLoss TaxationandDeadWeightLoss PercentageTaxonHamburgers NegativeExternalities TaxesforFactoringinNegativeExternalities TragedyoftheCommons Inequality,Poverty,andDiscrimination MeasuringIncomeInequality IntroductiontoConsumerChoices TheAnalysisofConsumerChoice TheArtofChoosing MarginalUtility BudgetLine DerivingDemandCurvefromTweakingMarginalUtilityperDollar EqualizingMarginalUtilityperDollarSpent AddingDemandCurves PreferenceandUtility IndifferenceCurveAnalysis:AnAlternativeApproachtoUnderstandingConsumerChoice IndifferenceCurves IndifferenceCurveAnalysis TypesofIndifferenceCurves OptimalPointonBudgetLine ProductionCost ProductionChoicesandCosts:TheShortRun CostsintheShortRun CostandIndustryStructure UnderstandingNormalProfit AFirm'sMarginalProductRevenueCurve EconomicProfitvs.AccountingProfit DepreciationandOpportunityCostofCapital UnderstandingtheShort-RunShutdown Fixed,Variable,andMarginalCost VisualizingAverageCostsandMarginalCostsasSlope MarginalCostandAverageTotalCost MarginalRevenueandMarginalCost MarginalRevenuebelowAverageTotalCost ProductionChoicesandCosts:TheLongRun Long-TermSupplyCurveandEconomicProfit TheStructureofCostsintheLongRun PrinciplesofMicroeconomicsLectureNotes CompetitiveMarketsforGoodsandServices PerfectCompetition MoreonPerfectCompetition WagesandEmploymentinPerfectCompetition HowManyPeopletoHireGiventheMPRCurve PerfectCompetitionDemonstration Monopoly TheMonopolyModel IntroductiontoaMonopoly MonopolyBasics ReviewofRevenueandCostGraphsforaMonopoly MonopolistOptimizingPrice(Part1):TotalRevenue MonopolistOptimizingPrice(Part2):MarginalRevenue MonopolistOptimizingPrice(Part3):DeadWeightLoss PriceDiscrimination FirstDegreePriceDiscrimination MonopolisticCompetition:CompetitionamongMany MonopolisticCompetition OligopoliesandMonopolisticCompetition MonopolisticCompetitionandEconomicProfit Oligopoly:CompetitionAmongtheFew Oligopolies,Duopolies,Collusion,andCartels OligopolyLecture GameTheoryofCheatingFirms MoreonNashEquilibrium WhyPartiestoCartelsCheat Prisoners'DilemmaandNashEquilibrium AntitrustPolicyandBusinessRegulation Regulation PublicFinanceandPublicChoice PublicEconomy TheEconomicsoftheEnvironment EconomicResources CapitalandNaturalResourceMarkets EnvironmentalProtectionandNegativeExternalities TheCoaseTheoremandtheTheoryoftheState MaximizingtheNetBenefitsofPollution Market-OrientedEnvironmentalTools ECON101StudyGuide CourseFeedbackSurvey ECON101:CertificateFinalExam Next SkipTableofcontents Tableofcontents 1.Introduction2.DecisionMakingbyComparingMarginalUtility3.ARuleforMaximizingUtility4.ApplyingtheRule5.AnotherRuleforMaximizingUtility6.WatchIt7.MeasuringUtilitywithNumbers8.TryIt9.CheckAnswers10.TryIt11.Glossary SkipActivities Activities Quizzes Resources