5 Steps to a 5 AP Microeconomics, 2014-2015 Edition

three scones (MU =20) for a total utility of 84 (10 + 30 + 24 + 20). But this combination

would only spend a total of $14, and surely Joe would be happier if he used all of his

income.

• To find the total utility of consuming two cups of coffee, sum up the marginal utility of
  the first and the second. Do the same for scones to calculate total utility.

Another possibility is to consume two cups of coffee (MU = 8) with four scones

(MU =16). This does indeed spend exactly $20. The total utility of 108 confirms that Joe

is happier with this combination of coffee and scones. There exists one other combination

of goods that satisfies our rule: four cups of coffee (MU =4) with six scones (MU =8)

expends too much money ($32) for Joe’s income.

So according to our rule, Joe’s utility maximizing decision would be to use his income

of $20 to consume two cups of coffee and four scones. What if he decided to experiment

and reallocate his consumption while still spending only $20 on coffee and scones? For

example, four cups of coffee (MU =4) and three scones (MU =20) fails our rule, but Joe

still is spending $20. On closer inspection, this is a poor decision because total utility falls

to 102.

Example:

Now the price of a cup of coffee falls to $1. Joe needs to reexamine his utility

maximizing combination of coffee and scones.

MUc/MUs=$1/$4 = .25

Again, there are three possibilities, but only one uses exactly $20 of income. If Joe buys

four cups of coffee (MU =4) and four scones (MU =16), he spends exactly his income and

receives total utility of 118. The combination of three cups of coffee and two scones does

not use all of the income, and the combination of five cups of coffee and six scones exceeds

the income constraint.

Connection Back to Demand Curves

Joe, as a utility maximizing consumer, chooses two cups of coffee at a price of $2 and four

cups of coffee at a price of $1. This sounds familiar! What Joe has done, simply by respond-

ing in a utility maximizing way, is illustrate the law of demand. The two combinations of

price and quantity demanded are two points on Joe’s coffee demand curve. By connecting

these points, we trace out his demand curve (Figure 7.22).

Elasticity, Microeconomic Policy, and Consumer Theory ‹ 97

Quantity

Price $

D Joe

2

1

2 4

Figure 7.22

TIP