SOLVED EXERCISES IN MACROECONOMICS: THEORY OF UTILITY OR THEORY

OF THE CONSUMER

1. For the data presented below, determine the optimal consumer, if PA= PB=
¢2, and his income is ¢12.

QA 1 2 3 4 5 6 7 8 9

UTA10 22 32 40 47 53 58 62 64

QB 1 2 3 4 5 6 7 8 9

UMB 6 8 10 4 2 1 0 -1 -2

Solution:

Q UTA UTB UMA UMB UMA/PA UMB/PB

1 10 6 10 6 5 3
2 22 14 12 8 6 4
3 32 24 10 10 5 5
4 40 28 8 4 4 2
5 47 30 7 2 3.5 1
6 53 31 6 1 3 0.5
7 58 31 5 0 2.5 0
8 62 30 4 -1 2 -0.5
9 64 28 2 -2 1 -1

The consumer acquires 8 units of A and 4 of B.

2. What is the central problem of consumer economic theory? Explain.

Answer: The central problem of consumer theory is the inability to quantify the degree of
satisfaction that consumers obtain.

3. Complete the table by replacing the question marks with the correct value:

Marginal Utility Quantity Total Utility

0 - ?
 1 9 ?

2 ? 20

3 ? 29

4 7 ?

5 5 ?

6 ? 44

7 1 ?

8 ? 45

9 ? 44

Solution:

Marginal Utility Quantity Total Utility

0 - 0

1 9 9

2 11 20

3 9 29

4 7 36
 5 5 41

6 3 44

7 1 45

8 0 45

9 -1 44

4. Graph, based on the data from the previous problem, the total utility and marginal utility.
(use two separate graphs). Indicate the inflection point and the saturation point in both
graphs.

5. A consumer can consume two goods A and B, which give them satisfaction or utility.
shown in the table:

Q UTA UTB
 1 11 16
2 21 28
3 30 38
4 38 46
5 45 52
6 51 56
7 56 59

It is known that the price of A is ¢1, the price of B is ¢2, and the consumer's income is ¢10.

a) How much of each good should be consumed to maximize utility?

b) How does the consumer's optimum change if the price of A rises to ¢2?

c) Derive the demand curve for good A.

d) When the price of good A varies, what effects are observed?

e) Calculate the price elasticity of demand for good A.

Solution:
a) How much of each good should be consumed to maximize utility?
The first step is to calculate marginal utility and marginal utility per colón spent (MU/P):
Q UTA UTB A UMA UMB UMA/PA UMB/PB
1 11 16 11 16 11 8
2 21 28 10 12 10 6
3 30 38 9 10 9 5
4 38 46 8 8 8 4
5 45 52 7 6 7 3
6 51 56 6 4 6 2
7 56 59 5 3 5 1.5

The consumer buys 6 units of A and 2 units of B, where both are verified.
optimal conditions:

Budget constraint:
I = PA QA + PB QB
10 = 1 x 6 + 2 x 2
10 = 10

Equimarginal condition:

UMA / PA = UMB / PB
6=6

b) How does the consumer's optimum change if the price of A increases to ¢2?
UM/P is recalculated:
Q UMA UMB UMA/PA UMB/PB
 1 11 16 5.5 8
2 10 12 5 6
3 9 10 4.5 5
4 8 8 4 4
5 7 6 3.5 3
6 6 4 3 2
7 5 3 2.5 1.5
Now the consumer acquires two units of A and three units of B.
c) Derive the demand curve for good A.
At the price of ¢1, the consumer bought 6 units, and at the price of ¢2, they bought 2.
units:
P Q
1 6
2 2

d) When the price of good A changes, what effects are observed?

An income effect and a substitution effect are presented. With the same income now the
the consumer does not purchase the same amount of good A, since when its price rises, an effect occurs
negative income.
It is also noted that as the price of A rises, the quantity of B increases, that is,
consumer replaces units of A with units of B.
e) Calculate the price elasticity of demand for good A.
Based on the demand data, the elasticity formula is applied:
P Q
1 6
2 2
TOPIC 4: UTILITY THEORY

Introduction:

The theory of utility seeks to explain consumer behavior. From this

perspective it is said that utility is the ability of a good to satisfy needs. Thus
A good is more useful to the extent that it better satisfies a need. This utility is qualitative.
(the real or apparent qualities of goods), it is spatial (the object must be located at
scope of the individual) and temporal (refers to the moment when the need is satisfied).

This theory is based on several assumptions:

The consumer's income per unit of time is limited.

The characteristics of the good determine its utility and therefore affect decisions of
consumer.

The consumer seeks to maximize their total satisfaction (total utility), and therefore spends
all your income.

The consumer has perfect information, that is, they know the goods (their
features and prices.

The consumer is rational, this means that they seek to achieve their objectives, in this
the case is about achieving the greatest possible satisfaction. This means that the
the consumer is able to determine their preferences and be consistent in relation to
their preferences. Thus, if the consumer prefers good A over good B and prefers the
if he prefers good B over good C, then he will prefer good A over good C (transitivity).

The economic theory of consumer behavior faces an important problem.

(called the central problem of consumer theory), which is the impossibility of
quantify the degree of satisfaction or usefulness that the consumer derives from the goods. There is no
an objective measure of satisfaction. This problem has been faced through
two distinct approaches:
 Cardinal approach: It assumes that it is possible to measure utility, meaning that it is available.
of a measure unit of satisfaction.

Ordinal approach: In this approach, the consumer does not measure utility, they only establish
combinations of goods that are preferred or indifferent to others
combinations of goods.To see an explanation of the ordinal approach click here.

Cardinal approach:

Based on the mentioned assumptions and concepts, two concepts of utility are defined or
satisfaction

Total Utility: it is the total satisfaction from consuming a certain amount of a good.

Marginal Utility: it is the extra satisfaction from an additional unit of consumption.

Example: Suppose a consumer perceives the following levels of total and marginal utility
due to the consumption of chocolates:

Q UT UM
0 0 -
1 8 8
2 18 10
3 26 8
4 32 6
5 36 4
6 38 2
7 38 0
8 36 -2

Graphing both concepts:

The previous data shows that the LAW OF MARGINAL UTILITY is satisfied.
DECREASING, that is, the additional satisfaction of the consumer decreases as one
consume a greater amount of the good. Note that there is a turning point, from which
the marginal utility (MU) becomes decreasing:

How much should the consumer buy to reach their optimal point (maximum
satisfaction)?

To answer that question, more information is needed.

Consumer income.

The utility obtained from other alternative goods.

Assume that the consumer can buy two goods A and B. Then two must be met.
conditions to maximize total satisfaction:

The consumer spent all their income: budget constraint:

I = Pa· Qa + Pb· Qb
2. The consumer maximizes their total utility: equimarginality condition:

Example: A consumer perceives the following levels of total utility from consumption of the
goods A and B per unit of time:

Q UTa UTb
0 0 0
1 16 9
2 30 17
3 42 24
4 52 30
5 60 35
6 66 39

It is also known that the price of good A is ¢2 and the price of B is ¢1. The income of
The consumer is ¢10. How much of each good should the consumer buy in order to
maximize your total satisfaction?

To answer this question, it is necessary to calculate the marginal utility for each good and the
marginal utility per colon spent (marginal utility over the price of the good):

UMb /
Q UTa UTb UMa UMb UMa / Pa
Pb
0 0 0 - - - -
1 16 9 16 9 8 9
2 30 17 14 8 7 8
3 42 24 12 7 6 7
4 52 30 10 6 5 6
5 60 35 8 5 4 5
6 66 39 6 4 3 4

Based on that information, the consumer spends their income of ¢10. They first buy a
unit of B, since it provides a utility of 9, greater than the utility of the first unit
from A which is 8. Then he can buy indifferently between the first unit of A or the second.
of B, since they provide the same satisfaction. His income is enough to buy both.
units. So far, he has spent ¢4, as he has purchased two units of B at a price of
¢1 each and one unit of A priced at ¢2. It continues spending its entire income until
buy 3 units of A and 4 of B. At this point, he spent all his income and maximized his
satisfaction. This can be verified by checking the two mentioned conditions for
maximize total satisfaction

The consumer spent all their income: budget constraint:

I = Pa· Qa + Pb· Qb

¢10 = ¢2 · 3 + ¢1 · 4
 ¢10 = ¢6 + ¢4

¢10 = ¢10

2. The consumer maximizes their total utility: equimarginality condition:

12 / ¢2 = 6 / ¢1

6=6

The consumer, by purchasing 3 units of A and 4 units of B, has obtained a

total satisfaction of 72 (42 from A + 30 from B), which is the maximum possible satisfaction given these
prices and their income.

What happens if the price of A drops to ¢1?

To answer the question, it is necessary to recalculate the previous table, but now with the
new price of good A:

UMb /
Q UTa UTb UMa UMb UMa / Pa
Pb
0 0 0 - - - -
1 16 9 16 9 16 9
2 30 17 14 8 14 8
3 42 24 12 7 12 7
4 52 30 10 6 10 6
5 60 35 8 5 8 5
6 66 39 6 4 6 4

Based on that information, the consumer spends their income of ¢10. They first buy a
unit of A, since it provides a utility of 16, greater than the utility of the first unit
from B which is 9. Then he will buy the second, third, and fourth units of A, since each one
of them provides greater satisfaction than the first unit of B. Then she will buy the
the first unit of B, which provides greater satisfaction than the fifth unit of A. Thus it continues
spending all his income, even buying 6 units of A and 4 units of B. At this point
he spent all his income and maximized his satisfaction. This can be verified by checking the two
conditions mentioned to maximize total satisfaction:

1. The consumer spent all their income: budget constraint:

I = Pa· Qa + Pb· Qb

¢10 = ¢1.6 + ¢1.4

¢10 = ¢6 + ¢4

¢10 = ¢10

2. The consumer maximizes their total utility: condition of equimarginality:

 6 / ¢1 = 6 / ¢1

6=6

The consumer, by buying 6 units of A and 4 units of B, has obtained a

total satisfaction of 96 (66 from A + 30 from B), which is the maximum possible satisfaction given the
new prices and their income.

UTILITY AND THE LAW OF DEMAND:

The law of demand establishes an inverse relationship between price and quantity demanded, which
which is related to the theory of utility in that as the price of a...
well, it decreases the marginal utility of the last colon spent on the good, because the colon
marginal buys less of the good. The consumer reallocates the marginal colon away from the good.
causing the quantity demanded to fall in accordance with the law of demand.

If we take the previous example, it can be seen that when the price was ¢2, the quantity demanded
The quantity of good A was 3 units, and when the price dropped to ¢1, the quantity increased to 6 units.

Quantity
Price ¢
plaintiff
1 6
2 3

Graphing the demand curve:

SUMMARY OF THE TOPIC:

Utility is the satisfaction obtained by the consumer when consuming a good.

MARGINAL UTILITY (MU) is the extra satisfaction from an additional unit of consumption.
 LAW OF DIMINISHING MARGINAL UTILITY: the additional satisfaction of the consumer
with the last utility of consumption decreases as greater quantities of it are consumed
good.

Consumers seek to allocate their budget among different goods, so that

they can maximize the total utility of the goods they consume.

CONDITIONS FOR MAXIMIZING UTILITY AND EQUILIBRIUM OF

CONSUMER

1. Budget constraint: M = Pa· Qa + Pb· Qb

Consumers allocate their budget to equal the marginal utility received from
last colon spent on each consumed good.

THEME 4: UTILITY THEORY

Introduction:

The utility theory aims to explain consumer behavior. From this

From a perspective, utility is said to be the ability of a good to satisfy needs. Thus
A good is more useful to the extent that it better satisfies a need. This utility is qualitative.
(the real or apparent qualities of the goods) is spatial (the object must be located at
scope of the individual) and temporal (refers to the moment when the need is satisfied).

This theory is based on several assumptions:

The consumer's income per unit of time is limited.

The characteristics of a good determine its utility and therefore affect decision-making.
consumer.

The consumer seeks to maximize their total satisfaction (total utility), and therefore spends.
all your income.

The consumer has perfect information, that is, they know the goods (their
features and prices.

The consumer is rational, which means that they seek to achieve their objectives, in this
the case aims to achieve the greatest possible satisfaction. This means that the
the consumer is able to determine their preferences and be consistent in relation to
their preferences. Thus, if the consumer prefers good A over good B and prefers the
If she prefers good B over good C, then she will prefer good A over good C (transitivity).

The economic theory of consumer behavior encounters an important problem.

(called the central problem of consumer theory), which is the impossibility of
quantify the degree of satisfaction or utility that the consumer obtains from the goods. There is no
an objective measure of satisfaction. This problem has been faced through
two distinct approaches:

Cardinal approach: It assumes that it is possible to measure utility, that is, if it is available.
of a unit of measurement of satisfaction.

Ordinal approach: In this approach, the consumer does not measure utility, they only establish
combinations of goods that are preferred or indifferent to others
combinations of goods.To see an explanation of the ordinal approach click here.

Cardinal approach:

Based on the mentioned assumptions and concepts, two concepts of utility are defined or
satisfaction

Total Utility: it is the total satisfaction of consuming a certain amount of a good.

Marginal Utility: it is the extra satisfaction from an additional unit of consumption.

Example: Suppose a consumer perceives the following levels of total and marginal utility
for the consumption of chocolates:

Q UT UM
0 0 -
1 8 8
2 18 10
3 26 8
4 32 6
5 36 4
6 38 2
7 38 0
8 36 -2

Graphing both concepts:

The previous data shows that the LAW OF MARGINAL UTILITY is satisfied.
DECREASING, that is, the additional satisfaction of the consumer decreases as
consume a greater amount of the good. Note that there is a turning point, from which
the marginal utility (MU) becomes diminishing:

How much should the consumer buy to reach their optimal point (maximum
satisfaction)?

To answer that question, more information is necessary.

The consumer's income.

The utility obtained from other alternative goods.

Assume that the consumer can buy two goods A and B. Then two conditions must be met.
conditions to maximize total satisfaction:

1. The consumer spent all of their income: budget constraint:

I = Pa· Qa + Pb· Qb
2. The consumer maximizes their total utility: equimarginality condition:

Example: A consumer perceives the following levels of total utility from the consumption of the
goods A and B per unit of time:

Q UTa UTb
0 0 0
1 16 9
2 30 17
3 42 24
4 52 30
5 60 35
6 66 39

It is also known that the price of good A is ¢2 and the price of B is ¢1. The income of the
The consumer has ¢10. How much of each good should the consumer buy in order to
maximize your total satisfaction?

To answer this question, it is necessary to calculate the marginal utility for each good and the
marginal utility per colon spent (marginal utility divided by the price of the good):

UMb /
Q UTa UTb UMa UMb UMa / Pa
Pb
0 0 0 - - - -
1 16 9 16 9 8 9
2 30 17 14 8 7 8
3 42 24 12 7 6 7
4 52 30 10 6 5 6
5 60 35 8 5 4 5
6 66 39 6 4 3 4

Based on that information, the consumer spends their income of ¢10. They buy a first
unit of B, since it provides a utility of 9, greater than the utility of the first unit
From A that is 8. Then he can choose indiscriminately between the first unit of A or the second.
from B, since they provide the same satisfaction. Their income is enough to buy both
units. So far, he has spent ¢4, as he has purchased two units of B at a price of
¢1 each and one unit of A which costs ¢2. Thus, they continue spending their entire income until
buy 3 units of A and 4 of B. At this point, he spent all his income and maximized his
satisfaction. This can be verified by checking the two conditions mentioned for
maximize total satisfaction:

The consumer spent all their income: budget constraint:

I = Pa· Qa + Pb· Qb

¢10 = ¢2 · 3 + ¢1 · 4
 ¢10 = ¢6 + ¢4

¢10 = ¢10

2. The consumer maximizes their total utility: equimarginal condition:

12 / ¢2 = 6 / ¢1

6=6

The consumer, by buying 3 units of A and 4 units of B, has obtained a

total satisfaction of 72 (42 from A + 30 from B), which is the maximum possible satisfaction given these
prices and their income.

What happens if the price of A drops to ¢1?

To answer the question, it is necessary to recalculate the previous table, but now with the
new price of good A

UMb /
Q UTa UTb UMa UMb UMa / Pa
Pb
0 0 0 - - - -
1 16 9 16 9 16 9
2 30 17 14 8 14 8
3 42 24 12 7 12 7
4 52 30 10 6 10 6
5 60 35 8 5 8 5
6 66 39 6 4 6 4

Based on that information, the consumer spends their income of ¢10. They buy a
unit of A, since it provides a utility of 16, higher than the utility of the first unit
from B, which is 9. Then he will buy the second, third, and fourth units of A, since each one
of them provides greater satisfaction than the first unit of B. Afterwards, she will buy the
first unit of B, which provides greater satisfaction than the fifth unit of A. Thus it continues
spending all of his income, even buying 6 units of A and 4 units of B. At this point
spent all his income and maximized his satisfaction. This can be verified by checking the two
Conditions mentioned to maximize total satisfaction:

The consumer spent all his income: budget constraint:

I = Pa· Qa + Pb· Qb

¢10 = ¢1.6 + ¢1.4

¢10 = ¢6 + ¢4

¢10 = ¢10

2. The consumer maximizes their total utility: equimarginality condition:

 6 / ¢1 = 6 / ¢1

6=6

The consumer, by purchasing 6 units of A and 4 units of B, has obtained a

total satisfaction of 96 (66 from A + 30 from B), which is the maximum possible satisfaction given the
new prices and their income.

UTILITY AND THE LAW OF DEMAND:

The law of demand establishes an inverse relationship between price and quantity demanded.
which relates to the theory of utility in that as the price of a
well, it decreases the marginal utility of the last colon spent on the good, due to the fact that the colon
marginal purchases less of the good. The consumer reallocates the marginal colon away from the good,
causing the quantity demanded to fall in accordance with the law of demand.

If we take the previous example, it is found that when the price was ¢2, the quantity demanded
The quantity of good A was 3 units, and when the price dropped to ¢1, the quantity increased to 6 units.

Quantity
Price ¢
defendant
1 6
2 3

Graphing the demand curve:

SUMMARY OF THE TOPIC:

Utility is the satisfaction obtained by the consumer when consuming a good.

MARGINAL UTILITY (MU) is the extra satisfaction from an additional unit of consumption.
 LAW OF DECREASING MARGINAL UTILITY: the additional satisfaction of the consumer
with the last utility of consumption decreases as a greater amount of it is consumed
good.

Consumers seek to allocate their budget among different goods, in such a way that
they can maximize the total utility of the goods they consume.

CONDITIONS FOR THE MAXIMIZATION OF UTILITY AND EQUILIBRIUM OF

CONSUMER

Budget constraint: M = Pa· Qa + Pb· Qb

Consumers allocate their budget to equalize the marginal utility received from
last colon spent on each consumed good.

…………………………………………..

howtocalculatemarginalutility,
averageutility
CalssfiedaoscenoM
:m
arcíI
023-02

Marginau
ltily(Umx):

RepresensthenicreasenihteprofatibytiloafnarcitX
el'as'hteconsumer
:si tietaucllacom
torT
fahuel.ortcafsim
asthetoftm
uonieuosr

Umx=DUtx/DQx

Where:

Umx=Uytilofaceratniarcitel.

DUtx=Increase or addition of the total utility of certain items.

DQx=Increase or addition of the quantity of a certain article.

ThneicreaseosarddoitinrescordedbyQxaredvidied.
 ow
leao:bfleF
nhtxgeaiotm
nriepl

Qx Utx Umx
0 0 -
1 10 10
2 18 8
3 24 6
4 28 4
5 30 2
6 30 0
7 28 2-
8 24 4-

Share from the second level

1y

So:

Umx=DUxtD
/ Qx=101/=10

w
U
hn1acthixevm
0oa8netfvg.nolecsafirneatsalT
elphaler

Wexetnded1andchangoet2w
dti,hcihmeaninctisreasedby1.

Umx=DUxtD
/ Qx=81/=8

PU
caurlpx:

Upx=Utx/Qx

Wesubuthsietevauleoshtfeormuafolhtrosefromhtaetbealndwehavheta:t

Upx=UtxQ
/ x=101/=10

Upx=Utx/Qx=18/2=9

Qx Utx Umx Upx

0 0 - -
1 10 10 10
2 18 8 9
3 24 6 8
4 28 4 7
5 30 2 6
6 30 0 5
 7 28 2- 4
8 24 4- 3

w
Ifegrapw
hteitseui,olitudlbeobservedhtU
atnicreasea.s.
w
dsreatfaQ
uU
m
x=
(niad30xt)=
br5iE
lquiofntpoihetnghciaer liuntdeifsitasm
eoC
rauom
nssre
Q
(U
xna=
dn63tp0o)initaurtashet liuntnatoctnsansm
iantniatpoiT
shi
.seaerdceylqeoucntsoriretposhet

w
tihne,dsofnitcafsitashetotodw
ugerhosw
anetdrsT
the
m
hrao.tnsbgei tinadonitcafsitasdioftum
niuom
cnseore

ok.loutveitpiosansm
iantobriahevniiesadrceneT
patrhe

How
dw
ohtvgeU
u
aotylfen
h
vgu
yitm
xelsaen
sih
td
aq
iren
gluiatyltn
?it

yIfouconasredipteirsenaotinohtfeaddoitinotsUhxte,nyoum
i pelme.tnit
.uelvaousvieprhetotsuelvaolnaitdaihetda

SQ
i x=0U
,xtmubstequota0pl,oistinhtsaretnoutsednianysaiftcotryway.
w
U
oyhavucrftesS
ulxochnim
autgsibnesqcdayitu,xelnt
ow
lo:lsfm
esaw
rhnyedtoiaul

Qx Utx Umx
0 - -
1 10 10
2 18 8
3 24 6

)xU
tst i (01=01)U
m
xdnoces(+0)U
m
xtsr iF(

)xU
tsi (81=8)U
m
xdr iht (+01)deniatO
b(

i ( 42=6U
M
X
)ht ruof( +81 )deniatO
b(

InhtecashetU
atpxyQxdansitogvtienotuos,batniUxtyandUmoxt,
fo elbat erut raped eht evlos ot
:shitkeilokw
ldoulti

Utx

Thenwewoudlhavheteaveragytem
uilitupietldbyhtenumbeorsaefitrs.
ytiliutlaott
 0*0=0

10*1=10

9*2=18

2=
43*8

OncehteUxthasbeenobatniedht,emsisnigmargniaulytilnihteatbelcanbecaclualetdby
averageofthenormaldistribution.

SsioolnosdeiranolsdaotsdealQxyUmxenotncesetndemosquecaclualrealumenot
dQ
eoxm
qutem
raocm
soD.

Qx Utx Umx Upx

0 - - 0
10 60 6 6
20 140 8 7
30 240 10 8

Inhtesoum
loitni,ubsteconsdieredhteatchpeiceodfafrotmhteUXshowphtsyroeiulivtdies.
.stuni10ofesaenrcinasieQ
hretx=
f0iSuocm
n,sde.tunihcaeorf
Qx=10,thetableindicatesthatUmxforeachunitequals6.ToachieveUtx,itmustbe
Multiplyitbyeachunit,whichatthislevelequals6fortheincreaseof
Qx=0aQx=10,whichequals10,theresultwilequal60,whosevaluemustbe
um
oclU
xhne.tni lE
olnr

Utx=Umx*DQx

nuw
sevhlaetbm
austw
het,yanindeiaobtsiU
xohm
ertfaow
dtanlgoilT
fhe
ytiliuthetdocerum
ocldhosulsnhitnecisU
xo,usvetiprhetotdadebm
hyetus
uocm
n.sipotf laott

Utx=Umx*DQx+Utxanterior

m
orf.am
nourlslatiseipaolnitauclT
lache