Download Name Block ______ Date ______ Utility and consumer decision

Name ____________________________________________________ Block __________ Date _____________
Utility and consumer decision making
AP Microeconomics /
1. Watch MJMFoodie Episode 17, Diminishing Marginal Utility. https://www.youtube.com/watch?v=KOUJEyy48qY
a. What does the term “utility” mean?
b. What happens to Jim’s satisfaction from each additional cookie he eats?
c. What is the law of diminishing marginal utility?
d. In what circumstance does marginal utility harm total utility?
2. Watch MJM Foodie Episode 18, Consumer Equilibrium. https://www.youtube.com/watch?v=JiJlZGqZXZk.
a. Why does MU/$ matter?
b. What is the “consumer equilibrium” rule? (Krugman will call this the optimal consumption rule or the utility max. rule)
3. Read Krugman Ch 10. 269-277, 279-285 Work problems 1, 2, 5, 6, 12, 14. Check solutions online.
What meaning / relevance do the following terms have for examining consumer behavior? (I will check these,
but use this as a guide to think through the chapter.)
Consumption bundle
Marginal utility per dollar
Marginal utility
Utility maximizing principle of marginal analysis
Budget constraint / budget line
Substitution effect
Consumption possibilities
Income effect
Optimal consumption bundle
Giffen good
4. Complete the following chart:
Cans of Soda
Total Utility
Marginal Utility (note: MU actually occurs between points)
0
0
1
10
2
22
12
3
32
4
8
5
4
6
44
7
42
a. When does diminishing marginal utility begin?
b. Imagine the soda is free (marginal cost of each can is zero). If this were your utility schedule, how many cans
of soda would you consume? Why?
5. Explore the dining options available at a college or university you are interested in attending. (OR: do an internet
search on best dining halls in America). Dining plans at most colleges contain some mix of the two:
 Traditional dining halls, with all you care to eat, monitored by the “swipe.”
 A la carte dining options, where you choose specific items, paid for with flex dollars.
a) Which dining option should comprise the greater portion of your dining plan if you want to maximize total
utility? Explain using marginal utility and marginal cost.
b) Which dining option should comprise the greater portion of your dining plan if you want to minimize weight
gain? Explain using diminishing marginal utility.
6. Consider and complete the following chart. You can either buy a large burrito for $10 or a soda for $2.50.
Number
Marginal utility MU burrito /price of
Marginal utility
MU soda /price of soda
of burritos
burrito (MU/$)
of soda
(MU/$)
0
1
60
20
2
40
15
3
30
10
4
20
5
5
10
2.5
a. Imagine you have $15 to spend. Using the chart above, how many of each do you purchase? You will want to
compare the marginal utility per dollar of the goods, and spend budget / consume until MUx/Px = MUy/Py.
b. Now imagine your budget increases to $40. How many of each would you buy?
c. Now imagine the price of a soda increased to $5 (keeping the higher budget intact). How many of each
would you buy?
7. (Prior FRQ off AP exam) The table below shows total utility in utils that a utility-maximizing customer receives from
consuming two goods: apples and oranges.
a. Assume that apples cost $1 each, oranges cost $2 each, and the consumer spends the entire income of $7 on
apples and oranges. Using the concept of marginal utility per dollar spent, identify the quantity of apples and
oranges the consumer will purchase. Explain your reasoning.
b. With the prices of apples and oranges remaining constant, assume that the consumer’s income increases to
$12. Identify each of the following
i.
The combination of apples and oranges the consumer will now purchase
ii.
The total utility the consumer will receive from the combination in (i)
c. With income remaining at $12, assume the price of oranges increases to $4 each. Identify each of the following
i.
The combination of apples and oranges the consumer will now purchase
ii.
The total utility the consumer will receive from the combination in (i)