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CHAPTER 6
CONSUMER CHOICE AND DEMAND
In this chapter, you will find:
Learning Outcomes
Chapter Outline with PowerPoint Script
Chapter Summary
Teaching Points (as on Prep Card)
Solutions to Problems Appendix
Experiential Assignments
INTRODUCTION
This chapter examines the underpinnings of demand, using utility analysis to explore the relationship
LEARNING OUTCOMES
6-1 Explain why marginal utility decreases as more of a good or service is consumed.
Utility is the sense of pleasure or satisfaction that comes from consumption. Utility is subjective.
6-2 Given tastes, the prices for two different goods, and a budget constraint, describe the utility-
maximizing condition in your own words.
By attaching a numerical measure to utility, we can compare the total utility a particular consumer
gets from different goods as well as the marginal utility that consumer gets from additional
6-3 Explain how can you get a consumer surplus from consuming a particular good if, in equilibrium,
your marginal valuation of the good just equals the price you pay.
The consumer’s objective is to maximize utility within the limits imposed by income and prices.
Utility is maximized when the budget is exhausted and the marginal utility of the final unit consumed
divided by that good’s price is identical for each different good. Consumer surplus is the difference
Chapter 6 Consumer Choice and Demand 82
CHAPTER OUTLINE WITH POWERPOINT SCRIPT
Consumer choice in a world of scarcity is motivated by the desire to maximize satisfaction.
USE POWERPOINT SLIDE 2 FOR THE FOLLOWING SECTION
Utility Analysis
Tastes and Preferences: Utility is subjective. Different people have different tastes.
• Economists argue tastes are given and relatively stable – they aren’t in a constant state of flux.
USE POWERPOINT SLIDES 3-4 FOR THE FOLLOWING SECTION
The Law of Diminishing Marginal Utility: The more of a good an individual consumes per time period,
USE POWERPOINT SLIDES 5-11 FOR THE FOLLOWING SECTION
Measuring Utility: Developing numerical values for utility allows analysis about the utility from
consumption.
Units of Utility: Each person has a uniquely subjective utility scale.
USE POWERPOINT SLIDES 12-14 FOR THE FOLLOWING SECTION
Marginal Utility and the Law of Demand: By changing the price of one good and observing the utility-
maximizing levels of consumption, points along the demand curve can be generated.
USE POWERPOINT SLIDES 15-16 FOR THE FOLLOWING SECTION
Consumer Surplus
USE POWERPOINT SLIDES 17-19 FOR THE FOLLOWING SECTION
Market Demand and Consumer Surplus: At any point on the demand curve, the price reflects the dollar
value of the marginal utility derived from consuming an additional unit.
USE POWERPOINT SLIDE 20 FOR THE FOLLOWING SECTION
The Role of Time in Demand: People with a higher opportunity cost of time are more willing to pay a
higher money price for goods that save time.
Chapter 6 Consumer Choice and Demand
83
CHAPTER SUMMARY
Utility is the sense of pleasure or satisfaction that comes from consumption; it is the want-satisfying power
of goods, services, and activities. The utility you get from consuming a particular good depends on your
tastes. The law of diminishing marginal utility says that the more of a particular good you consume per
period, other things constant, the smaller the gain in total utility received from each additional unit
consumed. The total utility derived from consuming a good is the sum of the marginal utilities derived
from each additional unit of the good. At some point, additional consumption could reduce total utility.
The consumer’s objective is to maximize utility within the limits imposed by income and prices. In a
world without scarcity, utility is maximized by consuming a good until its marginal utility reaches zero. In
the real world—a world shaped by scarcity as reflected by prices—utility is maximized when the budget is
exhausted and the marginal utility of the final unit consumed divided by that good’s price is identical for
each different good.
TEACHING POINTS
1. This chapter and the next provide the foundation for microeconomics. This chapter will be the first
look most students will have at the concept of utility, and therefore many will be skeptical in regard to
2. Diminishing marginal utility is easy to explain, but you should point out that some goods may have
ranges over which marginal utility increases. For example, the first gallon of gasoline you put in your
3. An important point to make is that movements in relative prices, rather than movements in the
overall price level, cause alterations in consumer allocations. You can illustrate this by setting the
Chapter 6 Consumer Choice and Demand 84
4. Consumer surplus is discussed at some length in this chapter. It is a subject that will be of
considerable importance in measuring efficiency gains and losses at later stages of the course. It is
essential that students recognize that the height of the demand curve represents the marginal benefit
(in dollar terms) for each unit of the good consumed. In developing consumer surplus, this idea
should be emphasized.
SOLUTIONS TO PROBLEMS APPENDIX
1. (Law of Diminishing Marginal Utility) Some restaurants offer “all you can eat” meals. How is this
practice related to diminishing marginal utility? What restrictions must the restaurant impose on the
customer in order to make a profit?
The marginal utility derived from each additional plate of food will diminish as you become full. The
2. (Law of Diminishing Marginal Utility) Complete each of the following sentences:
a. Your tastes determine the _____________ you derive from consuming a particular good.
b. _______________ utility is the change in ________________ utility resulting from a
_______________ change in the consumption of a good.
c. As long as the marginal utility is positive, total utility is ____________________________.
d. The law of diminishing marginal utility states that as an individual consumes more of a good
during a given time period, other things constant, total utility ________________________.
a. Utility
d. Increases by smaller amounts
3. (Marginal Utility) Is it possible for marginal utility to be negative while total utility is positive? If
yes, under what circumstances is it possible?
Yes, it is possible. Total utility rises as long as marginal utility is positive. When total utility starts to
4. (Utility Maximization) The following tables illustrate Eileen’s utilities from watching first-run
movies in a theater and from renting movies from a video store. Suppose that she has a monthly
movie budget of $36, each movie ticket costs $6, and each video rental costs $3.
Chapter 6 Consumer Choice and Demand
85
Movies in a Theater
Q TU MU MU/P
0 0 —— —— —
1 200 —— ———
2 290 —— ———
3 370 —— ———
4 440 —— ———
5 500 —— ———
6 550 —— ———
7 590 —— ———
Movies from a Video Store
Q TU MU MU/P
0 0 —— ————
1 250 —— ————
2 295 —— ————
3 335 —— ————
4 370 —— ————
5 400 —— ————
6 425 —— ————
a. Complete the tables.
b. Do these tables show that Eileen’s preferences obey the law of diminishing marginal utility?
Explain your answer.
c. How much of each good does Eileen consume in equilibrium?
d. Suppose the prices of both types of movies drop to $1 while Eileen’s movie budget shrinks to
$10. How much of each good does she consume in equilibrium?
a. Movies in a Theater Movies from a Video Store
Q TU MU MU/P Q TU MU MU/P
0 0 0 0 0 0 0 0
5. (Utility Maximization) Suppose that a consumer has a choice between two goods, X and Y. If the
price of X is $2 and the price of Y is $3, how much of X and Y does the consumer purchase, given an
income of $17? Use the following information about marginal utility:
Units MUX MUY
1 10 5
2 8 4
3 2 3
4 2 2
5 1 2
The marginal utility per dollar will give the following data:
Good X Good Y
Units MUX MUx/Px MUY MUy/Py
1 10 5 5 1.66
6. (The Law of Demand and Marginal Utility) Daniel allocates his budget of $24 per week among three
goods. Use the following table of the marginal utilities for Good A, Good B, and Good C to answer
the questions below:
QA MUA QB MUB QC MUC
1 50 1 75 1 25
2 40 2 60 2 20
3 30 3 40 3 15
4 20 4 30 4 10
5 15 5 20 5 7.5
a. If the price of A is $2, the price of B is $3, and the price of C is $1, how much of each does
Daniel purchase in equilibrium?
b. If the price of A rises to $4 while the other prices and Daniel’s budget remain unchanged, how
much of each does he purchase in equilibrium?
c. Using the information from parts (a) and (b), draw the demand curve for good A. Be sure to
indicate the price and quantity demanded for each point on the curve.
a. Four units each of goods A, B, and C. The per dollar marginal utility is 10 for each good, and
Chapter 6 Consumer Choice and Demand
87
7. (Consumer Surplus) Suppose the linear demand curve for shirts slopes downward and that
consumers buy 500 shirts per year when the price of shirts is $30 and 1,000 shirts per year when the
price is $25.
a. Compared to the prices of $30 and $25, what can you say about the marginal valuation that
consumers place on the 300th shirt, the 700th shirt, and the 1,200th shirt they might buy each
year?
b. With diminishing marginal utility, are consumers deriving any consumer surplus if the price is
$25 per shirt? Explain.
c. Use a market demand curve to illustrate the change in consumer surplus if the price drops from
$30 to $25.
a. The 300th shirt is worth more than $30 to some consumers, the 700th shirt is worth less than
Chapter 6 Consumer Choice and Demand 88
8. (Consumer Surplus) Suppose supply of a good is perfectly elastic at a price of $5. The market
demand curve for this good is linear, with zero quantity demanded at a price of $25. Given that the
slope of this linear demand curve is –0.25, draw a supply and demand graph to illustrate the
consumer surplus that occurs when the market is in equilibrium.
The slope of the demand curve is
p
/
qd (see the Appendix to Chapter 1 for a review of slope).
9. (Role of Time in Demand) In many amusement parks, you pay an admission fee to the park but you
do not need to pay for individual rides. How do people choose which rides to go on?
The rides are allocated on the basis of the time costs incurred while standing in line waiting for the
10. (Consumer Surplus) If, toward the end of the day, some people become indifferent whether or
not they go on another ride, how can we say that they derived consumer surplus from their
visit to the amusement park that day?
Experiential Assignments
1. For more about the economics of consumption, have students read Jane Katz’s “The Joy of
Consumption: We Are What We Buy,” in the Federal Reserve Bank of Boston’s Regional Review at
Chapter 6 Consumer Choice and Demand
89
2. In this chapter, students learned that the cost of consumption involves both a money price and a
time price. In a Wednesday Wall Street Journal issue, have your students find the “Work and Family”
column. See if they can find some examples of changes in new goods, services, government policies,
