I. UNIT I

1. I. UNIT I . . B. CONSUMER BEHAVIOR AND UTILITY MAXIMIZATION 1. The law of diminishing marginal utility 2. Derivation of demand----- the equimarginal principle 3. The substitution effect 4. The income effect

2. Condition 1 MU MU MU MU MU MU N A B C D E = = = = = P P . . . . . P P P P N A B C D E Meaning: The marginal utility per dollar provided by the last unit of commodity A purchased = the marginal utility per dollar provided by the last unit of B purchased...................

3. + + P (Q ) = INCOME + P (Q ) ....... P (Q ) P (Q ) N N C C B B A A Meaning: Expenditures on A plus expenditures on B plus expenditures on C plus expenditures on ................. = income. In other words, you use all your money.

4. Assumptions: Fixed and Unchanging • The Buyer’s Taste • The Buyer’s Income • Price of the Substitute

6. PRICE QUANTITY DEMANDED $1 _____________ .50 _____________

7. NO. OF 'BURGERS MU MU/P ORDER OF PURCHASE 1 100 2 80 3 60 4 40 5 20 6 0 NO. OF PIZZAS MU MU/P ORDER OF PURCHASE 1 100 2 90 3 80 4 70 5 60 6 50 7 40

8. PRICE QUANTITY DEMANDED 2 $1 _____________ .50 _____________

9. CONDITION 1: MU = MU H P P P P H

10. CONDITION 1: MU = MU H P = P P H P 80 80 = $1 $1

11. CONDITION 2: P (Q ) + P (Q ) = $5 H H P P

12. CONDITION 2: P (Q ) + P (Q ) = $5 H H P P $1(2) + $1(3) = $5

13. NO. OF 'BURGERS MU MU/P ORDER OF PURCHASE 1 100 2 80 3 60 4 40 5 20 6 0 NO. OF PIZZAS MU MU/P ORDER OF PURCHASE 100 1 100 90 2 90 80 3 80 70 4 70 60 5 60 50 6 50 40 7 40

14. PRICE QUANTITY DEMANDED 2 $1 _____________ 4 .50 _____________

15. CONDITION 1: MU = MU H P = P P H P 40 80 = .50 $1

16. CONDITION 2: P (Q ) + P (Q ) = $5 P P H H $.50(4) + $1(3) = $5