Lesson: Consumption Choices

A Rule for Maximizing Utility

A Rule for Maximizing Utility

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  • Economists believe that maximizing utility means consumers look at the price and determine how helpful a product will be to them.
  • Companies want their products and services to bring the greatest level of satisfaction to the consumer.

This process of making decisions suggests a rule to follow when maximizing utility. Since the price of T-shirts is twice as high as the price of movies, to maximize utility the last T-shirt that José chose needs to provide exactly twice the marginal utility (MU) of the last movie. If the last T-shirt provides less than twice the marginal utility of the last movie, then the T-shirt is providing less marginal utility per dollar spent than José would receive from spending the same money on movies. If this is so, José should trade the T-shirt for more movies to increase his total utility. 

If the last T-shirt provides more than twice the marginal utility of the last movie, then the T-shirt is providing more marginal utility per dollar than if the money were spent on movies. As a result, José should buy more T-shirts. Notice that at José’s optimal choice of point S, the marginal utility from the first T-shirt, of 22 is exactly twice the marginal utility of the sixth movie, which is 11. At this choice, the marginal utility per dollar is the same for both goods. This is a tell-tale signal that José has found the point with highest total utility.