CONSUMER UTILITY MAXIMIZATION EXAMPLE ANALYSIS

The problem facing the consumer is one of choice. How to choose the right amounts of n goods to maximize his happiness or utility. Below is an analysis of how a consumer can attack this problem and arrive at the best solution (i.e., the one that provides him the greatest utility). First lets look at the parameters of the problem. The consumer starts with a set of preferences for the n goods. However, to make the analysis more understandable and graphable lets assume the consumer only needs to choose between two goods (pizza and sodas). The consumer likes both pizza and soda and derives utility from consuming both goods. Each unit of pizza (say a slice) and each unit of soda (say a bottle) consumed gives the consumer some satisfaction. We refer to the satisfaction derived from the last unit of a good consumed, it marginal utility. The cumulative (or sum) of all the marginal utilities is referred to as total utility. So, the consumer wants to maximize his total utility to achieve the greatest satisfaction he can. If goods were free or if the consumer had unlimited resources (money or income), then he could buy as much as he wanted of any good and could achieve unlimited satisfaction/happiness). Unfortunately, he does not have unlimited resources and goods are not free. So, he constrained by his income and the costs of the goods he desires. Let describe a possible situation facing a consumer. Consider Consumer A: Below is a table of the utility he derives from consuming various amounts of the two goods pizza and soda. If the price of a piece of pizza and the price of a soda is the same (say, $1.00), then he would select the following sequence of units of soda and pizza to achieve the maximize utility per $ spent. CONSUMER As UTILITY TABLE Units Utils - Pizza Utils - Soda Choice Utils of Choice Total Utils 1 40 35 P 40 40 2 38 33 P 38 78 3 35 31 P 35 113 4 32 29 S 35 148 5 29 26 S 33 181 6 26 23 P 32 213 7 23 20 S 31 244 8 19 17 P 29 273 9 15 14 S 29 302 10 11 10 P 26 328 11 6 6 S 26 354 12 1 1 P 23 377

Now, we know the consumer does not have unlimited resources to spend on pizza and soda, but some limited amount. Lets assume it is $12. What combination of units of pizza and soda should the consumer buy to maximize his utility? Examine the above table. The first dollar the consumer spends should be on pizza. (Why?). Because he gets the greatest utility from consuming the first slice of pizza. On what should the consumer spend his next dollar? On another slice of pizza, because doing so will give him the highest utility. Continue this

process of looking at where the consumers next dollar should be spent and you will see the sequence of purchases showing the choices made by the consumer and the per unit marginal utility gained along with the total utility achieved. Now how would the above change, if the price of pizza doubled?