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Consumer Behavior and
Utility Maximization
AP ECONOMICS – CHAPTER 5
4 Key Concepts
Understanding Utility: Total and Marginal
2. Utility Maximization: Equalizing Marginal Utility
per Dollar (MU/PA = MU/PB)
3. Individual and Market Demand Curves
4. Income and Substitution Effects (review from unit
two)
1.
Introduction
 The CONSUMER is essential to the market.
Understanding how the consumer makes his/her
purchasing decisions is key.
1. Understanding Utility
 Utility = Satisfaction/Happiness/Pleasure one
gets from consuming a good.
 Utility and usefulness are NOT synonymous in
economics.
 Utility is difficult to quantify, as it differs between
people and situations

ie. A blanket to a person living in Arizona vs. a person living
in Minnesota.
 Measured in “utils” (a personal measure)
1. Understanding Utility
 Total Utility (TU)
 Total amount of satisfaction or pleasure a person derives
from consuming a given quantity of that product
 Marginal Utility (MU)
 The extra satisfaction a consumer derives from one
additional unit of that product.
 In other words, the change in Total Utility that results from
the consumption of one more unit
Law of Diminishing Marginal Utility
 Explains that the more of a good a person gets, the
less utility he gets from each additional unit.
 Consumer wants in general are insatiable, but wants
for particular items can be satisfied for a time.

Example: Durable goods such as an automobile
First is the Best
 It is important to note that your marginal utility
begins to fall after the very first unit you consume.
 In other words, your very first taco holds great
utility. While you may enjoy your second taco, it
doesn’t bring as much utility as the first
 At some point, your MU becomes negative. (takes
away from your total satisfaction).
Law of Diminishing Marginal Utility
(1)
(2)
(3)
Tacos
Total Marginal
Consumed Utility, Utility,
Per Meal Utils
Utils
2
3
4
5
6
7
0
10
18
24
]
]
]
]
28
]
30
]
30
]
28
10
8
4
2
0
-2
30
TU
20
10
0
6
Marginal Utility (Utils)
0
1
Total Utility (Utils)
Total Utility
1
2
3
4
5
6
Units Consumed Per Meal
7
Marginal Utility
10
8
6
4
2
0
-2
MU
1
2
3
4
5
6
Units Consumed Per Meal
7
2. Utility Maximization
 Explains how consumers allocate their money
incomes among the many goods and services
available for purchase
 You will be faced with problems that provide you
with a consumer’s MU or TU derived from
purchasing 2 goods. You will be expected to show
how many of each a rational consumer would
purchase.
Theory of Consumer Behavior
Numerical Example:
Find the Utility-Maximizing Combination of
A and B, if you have an Income of $10
(1)
Unit of
Product
First
Second
Third
Fourth
Fifth
Sixth
Seventh
(2)
Product A:
Price = $1
(b)
Marginal
(a)
Marginal
Utility
Utility,
Per Dollar
Utils
(MU/Price)
10
8
7
6
5
4
3
10
8
7
6
5
4
3
(3)
Product B:
Price = $2
(b)
Marginal
(a)
Marginal
Utility
Utility,
Per Dollar
Utils
(MU/Price)
24
20
18
16
12
6
4
12
10
9
8
6
3
2
Theory
of
Consumer
Behavior
Numerical Example:
Utility-Maximizing Combination of Products
A and B Obtainable with an Income of $10
(1)
Unit of
Product
(2)
Product A:
Price = $1
(b)
Marginal
(a)
Marginal
Utility
Utility,
Per Dollar
Utils
(MU/Price)
(3)
Product B:
Price = $2
(b)
Marginal
(a)
Marginal
Utility
Utility,
Per Dollar
Utils
(MU/Price)
First
10
10
24
12
Second
8
8
20
10
Third
7
7
18
9
Compare
Marginal
Utilities
Fourth
6
6
16
8
Then
Compare
Per 5Dollar - MU/Price
Fifth
5
12
6
Choose
the4Highest4
Sixth
6
3
Check
- Proceed
to Next
Item2
Seventh Budget
3
3
4
Theory of Consumer Behavior
Numerical Example:
Utility-Maximizing Combination of Products
A and B Obtainable with an Income of $10
(1)
Unit of
Product
(2)
Product A:
Price = $1
(b)
Marginal
(a)
Marginal
Utility
Utility,
Per Dollar
Utils
(MU/Price)
(3)
Product B:
Price = $2
(b)
Marginal
(a)
Marginal
Utility
Utility,
Per Dollar
Utils
(MU/Price)
First
10
10
24
12
Second
8
8
20
10
Third
7
7
18
9
Again,
Compare
Per6 Dollar -16
MU/Price8
Fourth
6
Choose
the5Highest5
Fifth
12
6
Buy
Has
Sixth One of 4Each – Budget
4
6 $5 Left
3
Proceed
to 3Next Item
Seventh
3
4
2
Theory of Consumer Behavior
Numerical Example:
Utility-Maximizing Combination of Products
A and B Obtainable with an Income of $10
(1)
Unit of
Product
(2)
Product A:
Price = $1
(b)
Marginal
(a)
Marginal
Utility
Utility,
Per Dollar
Utils
(MU/Price)
(3)
Product B:
Price = $2
(b)
Marginal
(a)
Marginal
Utility
Utility,
Per Dollar
Utils
(MU/Price)
First
10
10
Second
8
8
Third
7
7
Fourth
6
6
Again,
Compare
Per5 Dollar
Fifth
5
Buy
B – 4Budget
Sixth One More
4
Proceed
to 3Next Item
Seventh
3
24
12
20
10
18
9
16
8
-12
MU/Price6
Has
6 $3 Left
3
4
2
Theory of Consumer Behavior
Numerical Example:
Utility-Maximizing Combination of Products
A and B Obtainable with an Income of $10
(1)
Unit of
Product
(2)
Product A:
Price = $1
(b)
Marginal
(a)
Marginal
Utility
Utility,
Per Dollar
Utils
(MU/Price)
(3)
Product B:
Price = $2
(b)
Marginal
(a)
Marginal
Utility
Utility,
Per Dollar
Utils
(MU/Price)
First
10
10
24
12
Second
8
8
20
10
Third
7
7
18
9
Fourth
6
6
16
8
Fifth
5
5
12
6
Again,
Compare
Per4 Dollar - MU/Price
Sixth
4
6
3
Buy
One of 3Each – 3Budget Exhausted
Seventh
4
2
Theory of Consumer Behavior
Numerical Example:
Utility-Maximizing Combination of Products
A and B Obtainable with an Income of $10
(1)
Unit of
Product
(2)
Product A:
Price = $1
(b)
Marginal
(a)
Marginal
Utility
Utility,
Per Dollar
Utils
(MU/Price)
(3)
Product B:
Price = $2
(b)
Marginal
(a)
Marginal
Utility
Utility,
Per Dollar
Utils
(MU/Price)
First
10
10
24
12
Second
8
8
20
10
Third
7
7
18
9
Fourth
6
6
16
8
Fifth
5
12
6
Final
Result
– At 5These Prices,
Sixth
4
4
6
3
Purchase
2 of Item
Seventh
3
3 A and 44 of B 2
Theory of Consumer Behavior
Algebraic Restatement:
MU of Product A
Price of A
8 Utils
$1
=
=
MU of Product B
Price of B
16 Utils
$2
Optimum Achieved - Money Income
is Allocated so that the Last Dollar
Spent on Each Good Yields the Same
Extra or Marginal Utility
Two-Good Practice Problem
Given MU, and an income/budget
constraint of $20… find the UtilityMaximizing Combination of A and B
(3)
Product B:
Price = $5
(2)
Product A:
Price = $2
Unit
MU
Unit
MU
1
20
1
30
2
10
2
20
3
6
3
15
4
3
4
5
5
1
5
-5
Two-Good Practice Problem
Given TU, and an income/budget
constraint of $9… find the UtilityMaximizing Combination of A and B
(3)
Product B:
Price = $1
(2)
Product A:
Price = $2
Unit
TU
Unit
TU
1
22
1
10
2
32
2
16
3
40
3
20
4
46
4
22
5
48
5
20
The Problem with Utils
 Answer the following problem:
 If Henry derives 5 utils from the 1st candy bar, 3
utils from the 2nd candy bar, 0 utils from the 3rd
candy bar, and -5 utils from the 4th candy bar…

How many candy bars should Henry consume if each candy
bar …
Is absolutely free (MC = 0)
 Costs $2
 Costs $4

From ‘Utils’ to ‘Benefit’
 Because Utils cannot be compared between people,
and cannot be compared to dollars… economists
must measure satisfaction in Benefit.


Benefit is the same concept as utility, but it is measured in
dollars (according to the consumer’s WILLINGNESS TO
PAY.
Total Benefit ($), Marginal Benefit ($)
Golden Rule of Consumption
 A rational consumer will continue to purchase
until…
MB = MC
To consume one more would mean your
marginal cost is greater than your marginal
benefit
3. Individual and Market Demand Curves
 Start with an individual consumer
 maybe you, maybe me, but could be anyone
 Derive demand curve for that individual
 focus on marginal utility or marginal benefit
 Add up demand curves for many such individuals to
get market demand curve
Assumption about consumer behavior
 General economic
principle
 People
 make purposeful
choices
 with limited resources
 When applied to the
behavior of consumers
 People
 maximize utility
 subject to a budget
constraint
3. Individual and Market Demand Curves
 Consider all consumers in the market
 Add up quantity demanded by all individuals at each
price to get market demand
 Add horizontally to create market demand curve
05_06
PRICE
(DOLLARS)
PRICE
(DOLLARS)
5
5
4
4
3
Pete's
demand
curve
2

3
2
1
0
Ann's
demand
curve

1
1
2
3
4
5
0
1
2
QUANTITY DEMANDED
BY PETE (POUNDS)
3
4
5
QUANTITY DEMANDED
BY ANN (POUNDS)
PRICE
(DOLLARS)
5
4
3
Market
demand
curve
2
1
0
1
2
3
4
5
6
7
8
9
10
QUANTITY DEMANDED
IN MARKET (POUNDS)
4. Substitution and Income Effects
 This topic on the AP Course Outline was already
covered in unit 2.
 To review, just remember that both of these effects
help to explain why the demand curve slopes
downward.
Review Questions – Utility
Which of the following factors contributes to a downwardsloping demand curve?
I. The income effect
II. The substitution effect
III. Diminishing marginal utility
 A.
 B.
 C.
 D.
 E.
I only
III only
I and II only
II and III only
I, II, and III
Review Questions – Utility
 What is the marginal utility of the third cup of peanuts





Brian consumes?
A. 3 units of utility
B. 9 units of utility
C. 12 units of utility
D. 2 units of utility
E. 14 units of utility
Review Questions – Utility
If the price of peanuts is $1 per cup and the price of jelly beans is $2
per cup, and Brian wants to maximize his utility, what should he
purchase first?
 A.
1 cup of peanuts because peanuts produce a lower total
utility
 B.
1 cup of peanuts because the price of peanuts is lower
 C.
1 cup of peanuts, because the marginal utility per dollar for
peanuts is lower than the marginal utility per dollar of jelly beans
 D.
1 cup of jelly beans, because the marginal utility per dollar
for jelly beans is higher than the marginal utility per dollar of
peanuts
 E.
1 cup of jelly beans, because jelly beans produce a higher
total utility
Review Questions – Utility
If TU = total utility, MU = marginal utility, and P = price, in
order to maximize utility, a consumer should purchase
the mix of hamburgers and hot dogs where
 A. the MU of hamburgers equals the MU of hot dogs
 B. the MU equals the TU of hamburgers, and the MU
equals the TU of hot dogs
 C. the TU of hamburgers equals the TU of hot dogs
 D. the MU / P of hamburgers equals the MU / P of hot
dogs
 E. the TU / P of hamburgers equals the TU / P of hot
dogs
Review Questions – Utility
 If Matt’s total utility from consuming slices of cheese





increased at a constant rate, no matter how many
bratwurst Matt consumed, what would Matt’s demand
curve for slices of cheese look like?
A. Vertical
B. Horizontal
C. Downward sloping
D. Upward sloping
E. First upward, but eventually downward sloping
Review Questions – Utility
 Every day Molly spends her lunch money consuming apples, at $1





each, and oranges, at $2 each. At her current level of
consumption, molly’s marginal utility of apples is 12 and her
marginal utility of oranges is 18. If she has already spent all of her
lunch money, how should Molly change her consumption decision
to maximize utility?
A. She should make no changes; she is consuming the utility
maximizing combination of apples and oranges.
B. She should increase her apple consumption and decrease her
orange consumption until the marginal utility per dollar is equal
for both.
C. She should decrease her apple consumption and increase her
orange consumption until the marginal utility per dollar is equal
for both.
D. She should increase her apple consumption and decrease her
orange consumption until the marginal utility is equal for both.
E. She should decrease her apple consumption and increase her
orange consumption until the marginal utility is equal for both.
Review Questions – Utility
 If generic peanut butter is an inferior good, a decline in





consumer income causes
A. the price of generic peanut butter to go down.
B. the demand for name-brand peanut butter to go up.
C. the supply of generic peanut butter to go up.
D. the demand for generic peanut butter to go up.
E. the price of bread to go down.
Key Terms
 law of diminishing marginal utility
 utility
 total utility
 marginal utility
 rational behavior
 budget constraint
 utility-maximizing rule
 income effect
 substitution effect
Deriving the Demand Curve
Same Numeric Example:
Price Per Quantity
Unit of B Demanded
$2
4
1
6
Price of Product B
2
1
Income Effects
DB
0
Substitution Effects
4
6
Quantity Demanded of B