In this unit, Utility, you will learn about the following:
*Total Utility
*Utils
*Marginal Utility
*Diminishing Marginal Utility
*Marginal Utility Per-Dollar Spent
*Utility Maximization
*MU/$ of A = MU/$ of B
*Total Utility
*Utils
*Marginal Utility
*Diminishing Marginal Utility
*Marginal Utility Per-Dollar Spent
*Utility Maximization
*MU/$ of A = MU/$ of B
| Utility |
Here is an overview lesson about all of the topics listed above
Let's look at a simulation of someone eating donuts. Here is Adam, (big Adam), and he is one
of the finest human beings you would want to meet. I bet him $5 that he couldn't eat one box
of a dozen donuts during one class period. He says to me, "the bet is on."
Before he takes the first bite, I tell him
he is going to receive "utility" from that
first bite, so I help him by saying 100
utils is the highest number he can have.
He takes his first bite, and he tells me
he has 100 utils with the first bite.
Look at him--he is SATISFIED.
So, let's chart Adam's progress as he tries
to eat a dozen donuts in an hour without
killing himself. Don't try this at home.
of the finest human beings you would want to meet. I bet him $5 that he couldn't eat one box
of a dozen donuts during one class period. He says to me, "the bet is on."
Before he takes the first bite, I tell him
he is going to receive "utility" from that
first bite, so I help him by saying 100
utils is the highest number he can have.
He takes his first bite, and he tells me
he has 100 utils with the first bite.
Look at him--he is SATISFIED.
So, let's chart Adam's progress as he tries
to eat a dozen donuts in an hour without
killing himself. Don't try this at home.
Total Marginal Total
Bites Utility (Utils) Utility
0 -- 0
1 100 100
2 99 199
3 95 294
4 90 384
Notice that as he takes each bite,
his total utility keeps increasing, but
his marginal utility (utils) keep decreasing.
So, what is happening is his total utility
is increasing at a decreasing rate.
Bites Utility (Utils) Utility
0 -- 0
1 100 100
2 99 199
3 95 294
4 90 384
Notice that as he takes each bite,
his total utility keeps increasing, but
his marginal utility (utils) keep decreasing.
So, what is happening is his total utility
is increasing at a decreasing rate.
Each Marginal Total
Donut Utility (Utils) Utility MU/$
0 -- 0 0
1 450 450 900
2 425 875 850
3 375 1,250 750
4 300 1,550 600
5 200 1,750 400
6 75 1,825 150
7 0 1,830 10
8 -75 1,830 -10
9
10
11
12
Notice the table above represents the quantity of donuts and not the quantity of bites as
shown in the previous table. Notice as he eats each donut his total utility keeps increasing, but
his marginal utility (utils) keep decreasing. So, what is happening is his total utility is
increasing at a decreasing rate.
Donut Utility (Utils) Utility MU/$
0 -- 0 0
1 450 450 900
2 425 875 850
3 375 1,250 750
4 300 1,550 600
5 200 1,750 400
6 75 1,825 150
7 0 1,830 10
8 -75 1,830 -10
9
10
11
12
Notice the table above represents the quantity of donuts and not the quantity of bites as
shown in the previous table. Notice as he eats each donut his total utility keeps increasing, but
his marginal utility (utils) keep decreasing. So, what is happening is his total utility is
increasing at a decreasing rate.
Let's now include a budget constraint of $5 for your breakfast purchases for the week. Donuts
cost $0.50 each and bagels cost $1 each. Using the tables below, determine how many donuts
and how many bagels you will purchase with your $5 breakfast budget for the week?
Each Marginal Total
Donut Utility (Utils) Utility MU/$
0 -- 0 0
1 450 450 900
2 425 875 850
3 375 1,250 750
4 300 1,550 600
5 200 1,750 400
6 75 1,825 150
7 0 1,830 10
8 -75 1,830 -10
9
10
11
12
cost $0.50 each and bagels cost $1 each. Using the tables below, determine how many donuts
and how many bagels you will purchase with your $5 breakfast budget for the week?
Each Marginal Total
Donut Utility (Utils) Utility MU/$
0 -- 0 0
1 450 450 900
2 425 875 850
3 375 1,250 750
4 300 1,550 600
5 200 1,750 400
6 75 1,825 150
7 0 1,830 10
8 -75 1,830 -10
9
10
11
12
Each Marginal Total
Bagel Utility (Utils) Utility MU/$
0 -- 0 0
1 850 850 850
2 780 1,530 780
3 690 2,220 690
4 590 2,810 590
5 470 3,280 470
6 330 3,610 330
7 180 3,790 180
8 20 3,810 20
9 -150 3,660 -150
10
11
12
Bagel Utility (Utils) Utility MU/$
0 -- 0 0
1 850 850 850
2 780 1,530 780
3 690 2,220 690
4 590 2,810 590
5 470 3,280 470
6 330 3,610 330
7 180 3,790 180
8 20 3,810 20
9 -150 3,660 -150
10
11
12
You will purchase 4 donuts and 3 bagels.
Here is how your figure it out:
You have budgeted $5 to spend on donuts or bagels for the week.
Keep your eyes on the MU/$ spent columns for both donuts and bagels.
1st purchase is a donut (MU/$ for a donut is 900 and the MU/$ for a bagel is 850). You now have $4.50
remaining in your budget.
2nd purchase shows that you are indifferent (MU/$ for a donut is 850 and the MU/$ for a bagel is 850)
Let's say you purchase a bagel. You have now $3.50 remaining in your budget.
3rd purchase is a donut (MU/$ for a donut is 850 compared to the MU/$ for a second bagel of 780)
You have now $3 remaining in your budget.
4th purchase is a bagel (MU/$ for a third donut is 750 and the MU/$ for a second bagel is 780)
You have now $2 remaining in your budget.
5th purchase is a donut (MU/$ for a third donut is 750 and the MU/$ for a third bagel is 690)
You have now $1.50 remaining in your budget.
6th purchase is a bagel (MU/$ for a third donut is 600 and the MU/$ for a third bagel is 690)
You have now $0.50 remaining in your budget.
7th purchase is a donut (MU/$ for a fourth donut is 600 and the MU/$ for a fourth bagel 590)
You had now exhausted your budget of $5 for the week.
Again, you will purchase 4 donuts and 3 bagels. Notice this is where you maximize your utility.
Your total utility from this purchase is (1,550 + 2,220 = 3,770). Notice in the table below, if you spend
your budget of $5 in these various ways, you reach your maximum utility when you purchase 4 donuts
and 3 bagels.
Here is how your figure it out:
You have budgeted $5 to spend on donuts or bagels for the week.
Keep your eyes on the MU/$ spent columns for both donuts and bagels.
1st purchase is a donut (MU/$ for a donut is 900 and the MU/$ for a bagel is 850). You now have $4.50
remaining in your budget.
2nd purchase shows that you are indifferent (MU/$ for a donut is 850 and the MU/$ for a bagel is 850)
Let's say you purchase a bagel. You have now $3.50 remaining in your budget.
3rd purchase is a donut (MU/$ for a donut is 850 compared to the MU/$ for a second bagel of 780)
You have now $3 remaining in your budget.
4th purchase is a bagel (MU/$ for a third donut is 750 and the MU/$ for a second bagel is 780)
You have now $2 remaining in your budget.
5th purchase is a donut (MU/$ for a third donut is 750 and the MU/$ for a third bagel is 690)
You have now $1.50 remaining in your budget.
6th purchase is a bagel (MU/$ for a third donut is 600 and the MU/$ for a third bagel is 690)
You have now $0.50 remaining in your budget.
7th purchase is a donut (MU/$ for a fourth donut is 600 and the MU/$ for a fourth bagel 590)
You had now exhausted your budget of $5 for the week.
Again, you will purchase 4 donuts and 3 bagels. Notice this is where you maximize your utility.
Your total utility from this purchase is (1,550 + 2,220 = 3,770). Notice in the table below, if you spend
your budget of $5 in these various ways, you reach your maximum utility when you purchase 4 donuts
and 3 bagels.
Reff paying Adam his $5.
In this unit, Utility, you have learned about the following topics:
*Total Utility
*Utils
*Marginal Utility
*Diminishing Marginal Utility
*Marginal Utility Per-Dollar Spent
*Utility Maximization
*MU/$ of A = MU/$ of B
*Total Utility
*Utils
*Marginal Utility
*Diminishing Marginal Utility
*Marginal Utility Per-Dollar Spent
*Utility Maximization
*MU/$ of A = MU/$ of B
Grokkingecon.com eWorkbook Activities
Marginal Utility (3:12 minutes)
Reffonomics.com 3 x 3 Videos (3-minute videos + 3 Multiple Choice Questions)
Utility Maximization (2:19 minutes)
Grokkingecon.com eWorkbook Multiple Choice Questions
| Steven M. Reff Economics Lecturer University of Arizona (2007 - 2016) The 2015 University of Arizona Five-Star Faculty Award |
You will NOT eat the 8th donut because it give you NEGATIVE marginal utility.
Donuts
Total
Utility
Total
Utility
Bagel
Total
Utility
Total
Utility
| Total Utility Donuts + Bagels |
Donuts
($0.50)
($0.50)
Bagels
($1.00)
($1.00)
0
2
4
6
2
4
6
| 0 875 1,550 1,825 |
5
4
3
2
4
3
2
| 3,280 2,810 2,220 1,530 |
| 3,280 3,685 3,770 3,355 |
| Steven M. Reff Economics Lecturer University of Arizona (2007 - 2016) The 2015 University of Arizona Five-Star Faculty Award |