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Ch. 21: Consumer Behavior & Utility Maximization

Ch. 21: Consumer Behavior & Utility Maximization. Why is the demand curve downward-sloping? Income and Substitution Effects Law of Diminishing Marginal Utility Utility is Subjective Satisfaction is measured with units called “utils”

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Ch. 21: Consumer Behavior & Utility Maximization

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  1. Ch. 21: Consumer Behavior & Utility Maximization • Why is the demand curve downward-sloping? • Income and Substitution Effects • Law of Diminishing Marginal Utility • Utility is Subjective • Satisfaction is measured with units called “utils” • Gains in satisfaction become smaller as successive units of a specific product are consumed Prof. Ana Corrales ECO 2023 Notes

  2. Theory of Consumer Behavior • Rational Behavior • Preferences • Budget Constraint • At any point in time, consumers have fixed, limited income • Prices • Each consumer will choose a mix of goods & services that they find most satisfying (i.e., highest utility) Prof. Ana Corrales ECO 2023 Notes

  3. Utility-Maximizing Rule • Consumers allocate income so that the last dollar spent on each product yields the same among of marginal utility • MU are comparable on a per-dollar basis • To find out if the utility-maximizing rule has been met: • [MU(a)/P(a)] = [MU(b)/P(b)] Prof. Ana Corrales ECO 2023 Notes

  4. Applications & Extensions of Consumer Behavior & Utility Max • DVDs and DVD Players • Essential v. Luxury Goods • The Value of Time • Cost of Heath Care • Cash v. Non-cash Gifts Prof. Ana Corrales ECO 2023 Notes

  5. Ch. 21 Study Questions: • 2 • 3 • 5 • 8 • 9 Prof. Ana Corrales ECO 2023 Notes

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