FDA recommendation: people should consume less than 65 grams of fat per day. Theory of Consumer...
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FDA recommendation: people should consume less than 65 grams of fat per day. Theory of Consumer Behavior Goal of Consumers: maximize utility “well-being”
FDA recommendation: people should consume less than 65 grams of
fat per day. Theory of Consumer Behavior Goal of Consumers:
maximize utility well-being or satisfaction Consumers problem:
Choose diet to maximize utility subject to the budget constraint of
65 fat grams (ignore other costs) Utility maximization requires
(prove later): Marginal utilitythe utility from an additional Latte
In this example, the price equals the number of grams of fat.
Slide 2
additional pleasure per gram must be the same for everything we
eat, i.e, foods that contain twice the amount of fat must give us
twice the amount of pleasure. In October, a portion of the sales of
Pink Ribbon Bagels (with dried cherries and cranberries) go to
benefit breast cancer charities. Pink RibbonBlueberry Versus 7
grams2 grams Do I enjoy pink ribbons more than 3 times as much as
blueberries currently? NO. Hence, Im not maximizing my utility by
eating pink ribbons every morning.. Only the Cinnamon Crunch has
more fat (8 grams)!
Slide 3
Law of Diminishing Marginal Utilityas more and more blueberry
bagels are consumed, the marginal utility of eating blueberry
bagels must eventually fall. Law of Diminishing Marginal Utilityas
fewer pink ribbon bagels are consumed, the marginal utility of
eating pink ribbon bagels rises. works in both direction Hence, Ill
probably have a pink ribbon bagel occasionally but not every
morning.
Slide 4
On July 1 st 2008, the New York Board of Health required chain
restaurants to put calories on menu boards. Grande Chocolate Chip
Frappucino = = 580 Calories 6 Chicken & Bacon Ranch Sub = 580
Calories = Models assume consumers act as if > < or =
Slide 5
Slide 6
Russ sets aside $420 (Y) for tutoring (T) and fitness training
(F) each year. P T =$14 per hour P F =$21 per hour Horizontal
intercept:
Slide 7
Fitness Training (hours per year) Tutoring (hours per
year)
Slide 8
Russs budget constraint shows his consumption options between
fitness training and tutoring given his income (Y) and their prices
(P F and P T ). How do we show Russs preferences? Russs
indifference curves show all the combinations of fitness training
and tutoring that yield the same level of utility or well-being,
i.e. Russ is indifferent between all the combinations along a given
indifference curve.
Slide 9
Fitness Training (hours per year) Tutoring (hours per year)
Indifference curve Slope = MRS = MU T /MU F Indifference curves are
negatively-sloped and usually convex to the origin due to
diminishing marginal utility.
Slide 10
Fitness Training (hours per year) Tutoring (hours per
year)
Slide 11
Fitness Training (hours per year) Tutoring (hours per year) A B
E F What combination should Russ choose to maximize his
utility?
Slide 12
Fitness Training (hours per year) Tutoring (hours per year) A B
E F Point F is on a high indifference curve but Russ cannot afford
that combination, so we should ignore that combination.
Slide 13
Fitness Training (hours per year) Tutoring (hours per year) A B
E Points A, B, and E are on the budget constraint. Which maximizes
Russs utility? Point E, where the indifference curve is just
tangent to the budget constraint.
Slide 14
Fitness Training (hours per year) Tutoring (hours per year) A B
E At point E, MRS = slope of the budget constraint = P T /P F. At
point A, |MRS| > P T /P F, which implies that MU T /P T > MU
F /P F. Russ should increase tutoring ( MU T ) and decrease fitness
training ( MU F ) by moving down his budget constraint to point E.
At point B, |MRS| < P T /P F, which implies that MU T /P T <
MU F /P F. Russ should decrease tutoring (MU T ) and increase
fitness training ( MU F ) by moving up his budget constraint to
point E.
Slide 15
Suppose Harvard subsidies tutoring, but makes it unlimited P T
=$7 per hour P F =$21 per hour Horizontal intercept:
Slide 16
Fitness Training (hours per year) Tutoring (hours per
year)
Slide 17
Effect of Price Change Substitution effect: the lower price of
tutoring makes causes Russ to substitute tutoring for fitness
training to make MU T /P T once again equal to MU F /P F. Income
effect: the lower price of tutoring increases Russs real income so
he can afford to purchase more both goods.
Slide 18
Fitness Training (hours per year) Tutoring (hours per year) A B
S Substitution effect Income effect Substitution effect Income
effect
Slide 19
Suppose Harvard subsidies but only the first 10 hours
Slide 20
Physical Training (hours per semester ) Tutoring (hours per
semester )
Slide 21
Physical Training (hours per semester ) Tutoring (hours per
semester )