Polytechnic University of the Philippines College

of Social Sciences and Development Department of

Economics

INSTRUCTIONAL MATERIALS FOR

MICROECONOMICS

Compiled by

Melcah Pascua Monsura

Maria Vicenta Magpantay
 Table of Contents

Chapter 4 Consumer Behavior and Utility Maximization

4.1 The Concept of Total Utility and Marginal Utility

4.2 Theory of Consumer Behavior
4.3 Indifference Curve and Budget Line (Ordinal Utility)
Exercise 6

REFERENCES

2
CHAPTER 4: Consumer Behavior and Utility Maximization1

Learning Objectives: This chapter will discuss the consumer behavior through utility concepts.
It includes decision-making of the consumers on their consumption based on happiness and
income. After this chapter, the readers will be able to discuss the concept of utility, identify
consumer equilibrium, demonstrate the derivation of the individual demand curve, and distinguish
substitution and income effects.

Utility is a measure of the relative satisfaction from, or desirability of, consumption of

various goods and services. Measuring utility has two approaches, cardinal approach and ordinal approach.
Cardinal approach is a classical method of understanding utility using utils as measurement of
satisfaction. Ordinal approach is a new classical method of examining utility by ranking the preferences of
the consumers using indifference curve and budget line.

4.1 The Concept of Total Utility and Marginal Utility

Total utility and marginal utility are related, but different, ideas. Total utility is the total
amount of satisfaction or pleasure a person derives from consuming some specific quantity – for example,
10 units – of a good or service. Marginal utility is the extra satisfaction a consumer realizes from
an additional unit of that product—for example, from the eleventh unit. Alternatively, marginal utility is
the change in total utility that results from the consumption of 1 more unit of a product. The next graph
will demonstrate the relation between total utility and marginal utility.

Curves TU and MU are graphed from the

data in the table. (a) As more of a product is
consumed, total utility increases at a
diminishing rate, reaches a maximum, and then
declines. (b) Marginal utility, by
definition, reflects the changes in total utility.
Thus, marginal utility diminishes with
increased consumption, becomes zero when total
utility is at a maximum, and is negative when
total utility declines. As shown by the shaded
rectangles in (a) and (b), marginal utility is
the change in total utility associated with each
additional taco. Or, alternatively, each new
level of total utility is found by adding
marginal utility to the preceding level of total
utility.

Marginal utility (MU) remains positive but diminishes through the first 5 units (because
total utility increases at a declining rate). Marginal utility is zero for the sixth unit (because that unit
doesn’t change total utility). Marginal utility then becomes negative with the seventh unit and beyond
(because total utility is falling). Column 3 reveals that each successive taco yields less

1
The diagrams and tables used in this Chapter 4 were collected from McConnel, C. & Brue, S. (2008). Economics:
Principles, Problems, and Policies. 17th edition, McGraw Hill-Irwin,
extra utility, meaning fewer utils, than the preceding taco as the consumer’s want for tacos comes closer
and closer to fulfillment. That is law of diminishing marginal utility.

The curves reflect the data in the table.

Column 2 shows the total utility associated with
each level of consumption of tacos. Column 3
shows the marginal utility – the change in total
utility – that results from the consumption of
each successive taco. Starting at the origin in last
figure, observe that each of the first 5 units
increases total utility (TU), but by a diminishing
amount. Total utility reaches a maximum with the
addition of the sixth unit and then declines.

This principle shows that added satisfaction declines as a consumer acquires additional units of a
given product. Although consumer wants in general may be insatiable, wants for particular items
can be satisfied. In a specific span of time over which consumers’ tastes remain unchanged, consumers can
obtain as much of a particular good or service as they can afford. But the more of that product they obtain,
the less they want still more of it.

The law of diminishing marginal utility explains why the demand curve for a given product slopes
downward. If successive units of a good yield smaller and smaller amounts of marginal, or extra, utility,
then the consumer will buy additional units of a product only if its price falls.

4.2 Theory of Consumer Behavior

The following discussion is a cardinal approach, a classical approach of understanding utility

using utils, to measure and examine individual’s satisfaction and happiness. Cardinal utility allows precise
quantification of the marginal utilities upon which the utility-maximizing rule depends.

We will assume that the situation for the typical consumer has the following dimensions. Rational

behavior - The consumer is a rational person, who tries to use his or her money
income to derive the greatest amount of satisfaction, or utility, from it. Consumers want to get “the
most for their money” or, technically, to maximize their total utility. They engage in rational
behavior.

Preferences - Each consumer has clear-cut preferences for certain of the goods and services
that are available in the market. Buyers also have a good idea of how much marginal utility they will get
from successive units of the various products they might purchase.

Budget constraint - At any point in time the consumer has a fixed, limited amount of money
income. Since each consumer supplies a finite amount of human and property resources to society,
he or she earns only limited income. Thus, every consumer faces a budget constraint, even consumers
who earn millions of money a year. Of course, this budget limitation is more severe for a consumer
with an average income than for a consumer with an extraordinarily high income.
 Prices Goods - are scarce relative to the demand for them, so every good carries a price tag. We
assume that the price tags are not affected by the amounts of specific goods each person buys. After all,
each person’s purchase is a tiny part of total demand. Also, because the consumer has limited amount of
money, he or she cannot buy everything wanted. This point drives home the reality of scarcity to each
consumer. So, the consumer must compromise; he or she must choose the most satisfying mix of
goods and services. Different individuals will choose different mixes.

To maximize satisfaction, the consumer should allocate his or her money income so that the last
money spent on each product yields the same amount of extra (marginal) utility. We call this the utility-
maximizing rule. When the consumer has “balanced his or her margins” using this rule, there is no
incentive to alter the expenditure pattern. The consumer is in equilibrium and would be worse off –
total utility would decline – if there were any alteration in the bundle of goods purchased, providing there
is no change in taste, income, products, or prices.

The following illustration will help explain the utility-maximizing rule. For simplicity we limit our
example to two products, but the analysis also applies if there are more. Suppose consumer is analyzing
which combination of two products should purchase with fixed daily income of $10. These products
might be asparagus and breadsticks, apricots and bananas, or apples and broccoli. Let’s just call
them A and B. The consumer’s preferences for products A and B and their prices are the basic data
determining the combination that will maximize her satisfaction. The following table summarizes
those data, with column 2a showing the amount of marginal utility will derive from each successive unit of
A and with column 3a showing the same thing for product B. Both columns reflect the law of diminishing
marginal utility, which is assumed to begin with the second unit of each product purchased.

Marginal Utility per Dollar. To see how the

utility-maximizing rule works, we must put
the marginal utility information in columns 2a
and 3a on a per-dollar-spent basis. A
consumer’s choices are influenced not only by
the extra utility that successive units of
product A will yield but also by how many
dollars (and therefore how many units of
alternative product B) she must give up to
obtain those added units of A.

To make the amounts of extra utility derived from differently priced goods comparable,
marginal utilities must be put on a per-dollar-spent basis. We do this in columns 2b and 3b by dividing
the marginal-utility data of columns 2a and 3a by the prices of A and B – $1 and $2,
respectively.
Decision-Making Process to Maximize Consumer’s Utility

The table shows the consumer’s preferences on a unit basis and a per-dollar basis as well as the
price tags of A and B. With $10 to spend, in what order should the consumer allocate her dollars on units
of A and B to achieve the highest degree of utility within the $10 limit imposed by her income? And what
specific combination of A and B will she have obtained at the time she uses up her $10?
 Concentrating on columns 2b and 3b, we find that the consumer should first spend $2 on the first
unit of B, because its marginal utility per dollar of 12 utils is higher than A’s 10 utils. But now the
consumer finds herself indifferent about whether she should buy a second unit of B or the first unit of A
because the marginal utility per dollar of both is 10 utils. So, she buys both of them. The consumer now
has 1 unit of A and 2 units of B. Also, the last dollar she spent on each good yielded the same marginal
utility per dollar (10 utils). But this combination of A and B does not represent the maximum amount of
utility that the consumer can obtain. It cost her only $5 [= (1 X $1) + (2 X $2)], so she has $5 remaining,
which she can spend to achieve a still higher level of total utility.

Examining columns 2b and 3b again, we find that the consumer should spend the next $2 on a
third unit of B because marginal utility per dollar for the third unit of B is 9 compared with 8 for the
second unit of A. But now, with 1 unit of A and 3 units of B, she is again indifferent between a second unit
of A and a fourth unit of B because both provide 8 utils per dollar. So, the consumer purchases 1 more
unit of each. Now the last dollar spent on each product provides the same marginal utility per
dollar (8 utils), and money income of $10 is exhausted.

The utility-maximizing combination of goods attainable is 2 units of A and 4 of B. By

summing marginal-utility information from columns 2a and 3a, we find that the consumer is
obtaining 18 (= 10 + 8) utils of satisfaction from the 2 units of A and 78 (= 24 + 20 + 18 + 16) utils of
satisfaction from the 4 units of B. Her $10, optimally spent, yields 96 (= 18 + 78) utils of
satisfaction.

Algebraic Restatement

Our allocation rule says that a consumer will maximize her satisfaction when she allocates her
money income so that the last dollar spent on product A, the last on product B, and so forth, yield equal
amounts of additional, or marginal, utility. The marginal utility per dollar spent on A is indicated by the
MU of product A divided by the price of A (column 2b), and the marginal utility per dollar spent on B by
the MU of product B divided by the price of B (column 3b). Our utility- maximizing rule merely requires
that these ratios be equal. Algebraically,
𝑀𝑈 𝑜𝑓 𝑃𝑟𝑜𝑑𝑢𝑐𝑡 𝐴 𝑀𝑈 𝑜𝑓 𝑃𝑟𝑜𝑑𝑢𝑐𝑡 𝐵
=
𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝐴 𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝐵

Applying the algebraic expression in the decision-making process of the consumer:

8 𝑢𝑡𝑖𝑙𝑠 16 𝑢𝑡𝑖𝑙𝑠
=
$1 $2

The above equation shows that the utility of the consumer was maximized based on her decision- making.
If the equation is not fulfilled, the consumer’s utility was not maximized.

Recall that the basic determinants of an individual’s demand for a specific product are (1)
preferences or tastes, (2) money income, and (3) the prices of other goods. We continue to
suppose that her money income is $10. And, concentrating on the construction of a simple
demand curve for product B, we assume that the price of A, representing “other goods,” is still $1.
Deriving the Demand Schedule and Demand Curve

We can derive a single consumer’s demand schedule for product B by considering

alternative prices at which B might be sold and then determining the quantity the consumer will purchase.
We already know one such price-quantity combination in the utility-maximizing example: Given
tastes, income, and prices of other goods, the consumer will purchase 4 units of B at $2.
Now let’s assume the price of B falls to $1.
The marginal-utility-per-dollar data of column 3b will
double because the price of B has been halved; the new
data for column 3b are in fact identical to those in column
3a. But the purchase of 2 units of A and 4 of B is no
longer an equilibrium combination. By applying the
same reasoning, we used previously, we now find that
the utility-maximizing combination is 4 units of A
and 6 units of B. The consumer will purchase 6 units
of B when the price of B is $1. Using the data in this
table, we can sketch the downward- sloping demand
curve DB. This exercise, then, clearly links the
utility-maximizing behavior of a consumer and that
person’s demand curve for a particular product.

Income Effect and Substitution Effect

Income effect is the impact that a change in the price of a product has on a consumer’s real
income and consequently on the quantity demanded of that good. In contrast, the substitution effect is the
impact that a change in a product’s price has on its relative expensiveness and consequently on the
quantity demanded. Both effects help explain why a demand curve is such as down sloping.

Our analysis of utility maximization does not allow us to sort out the income effect and
substitution effect of a change in price on quantity demanded. But utility maximization does allow us to
understand why the quantity demanded of product B rises when the price of B falls (the price of A being
constant). Let’s first look at the substitution effect. Recall that before the price of B declined, the
consumer was in equilibrium when purchasing 2 units of A and 4 units of B in that MUA (8)/ PA ($1) =
MUB (16)/ PB ($2). But after B’s price decreases from $2 to $1, MUA (8)/ PA ($1) < MUB (16)/ PB ($1).
More simply stated, the last dollar spent on B now yields more utility (16 utils) than does the last dollar
spent on A (8 utils). A switching of purchases from A to B is needed to restore equilibrium; that is, a
substitution of now cheaper B for A will occur when the price of B drops.

What about the income effect? The decline in the price of B from $2 to $1 increases
consumer’s real income. Before the price decline, she was buying 2 of A and 4 of B. But at the lower $1
price for B, Holly would have to spend only $6 rather than $10 on the same combination of goods. She has
$4 left over to spend on more of A, more of B, or more of both. This rise in real income enables her to
obtain more of A and B with the same $10 of money income. The income effect is the extra amount of
B she decides to purchase because the decline in the price of B raised her real income.
4.3 Indifference Curve and Budget Line (Ordinal Approach)

In reality, measuring cardinal utility is highly difficult, at best. For instance, can you state exactly
how many utils you are getting from watching KDrama series? To avoid this measurement problem,
economists have developed an alternative explanation of consumer behavior and equilibrium in
which cardinal measurement is not required. In this more-advanced analysis, the consumer must simply
rank various combinations of goods in terms of preference.

Consider that Sally can simply report that she prefers 4 units of A to 6 units of B without having
to put number values on how much she likes either option. The model of consumer behavior that
is based upon such ordinal utility rankings is called indifference curve analysis. It has two main elements:
budget lines and indifference curves.

Budget line (or, more technically, a budget constraint) is a schedule or curve showing various
combinations of two products a consumer can purchase with a specific money income. If the price of
product A is $1.50 and the price of product B is $1, a consumer could purchase all the combinations of A
and B shown in the following table and Figure with $12 of money income. At one extreme, the
consumer might spend all of his or her income on 8 units of A and have nothing left to spend on
B. Or, by giving up 2 units of A and thereby “freeing” $3, the consumer could have 6 units of A and 3 of
B. And so on to the other extreme, at which the consumer could buy 12 units of B at $1 each, spending his
or her entire money income on B with nothing left to spend on A.

A consumer’s budget line. The budget line

shows all the combinations of any two
products that someone can purchase,
given the prices of the products and the
person’s money income.

The Figure above also shows the budget line graphically. Note that the graph is not
restricted to whole units of A and B as is the table. Every point on the graph represents a possible
combination of A and B, including fractional quantities. The slope of the graphed budget line
measures the ratio of the price of B to the price of A; more precisely, the absolute value of the
ଶ
slope is = $1.0ൗ . This is the mathematical way of saying that the consumer must
஺ %1.50 ଷ
𝑃஻
ൗ𝑃 =
forgo 2 units of A (measured on the vertical axis) to buy 3 units of B (measured on the horizontal
axis). In moving down the budget or price line, 2 units of A (at $1.50 each) must be given up
ଶ
obtaining 3 more units of B (at $1 each). This yields a slope of . ଷ

The budget line has two other significant characteristics:

1. Income changes. The location of the budget line varies with money income. An increase in money
income shifts the budget line to the right; a decrease in money income shifts it
 to the left. To verify this, recalculate the table in the above figure, assuming that money income is
(a) $24 and (b) $6, and plot the new budget lines in Figure.
2. Price changes. A change in product prices also shifts the budget line. A decline in the prices of
both products—the equivalent of an increase in real income—shifts the curve to the right. (You
can verify this by recalculating the table in Figure and replotting the above Figure assuming that
𝑃஺ = $0.75 and 𝑃஻ = $0.50) Conversely, an increase in the prices of A and B shifts the curve to
the left. (Assume 𝑃஺ = $3 and 𝑃஻ = $2 , and rework the table and Figure to substantiate this
statement.)

Note what happens if 𝑃஻ changes while 𝑃஺ and money income remain constant. In particular, if 𝑃஻ drops,
say, from $1 to $.50, the lower end of the budget line fans outward to the right. Conversely, if 𝑃஻
increases, say, from $1 to $1.50, the lower end of the line fans inward to the left. In both instances the
line remains “anchored” at 8 units on the vertical axis because 𝑃஺ has not changed.

Indifference Curves: What is Preferred

Budget lines reflect “objective” market data, specifically income and prices. They reveal
combinations of products A and B that can be purchased, given current money income and prices.
Indifference curves, on the other hand, reflect “subjective” information about consumer
preferences for A and B. An indifference curve shows all the combinations of two products A and B that
will yield the same total satisfaction or total utility to a consumer. The table and graph below present a
hypothetical indifference curve for products A and B. The consumer’s subjective preferences are such that
he or she will realize the same total utility from each combination of A and B shown in the table or on the
curve. So, the consumer will be indifferent (will not care) as to which combination is actually obtained.

A consumer’s indifference curve. Every point

on indifference curve I represents some
combination of products A and B, and all
those combinations are equally satisfactory
to the consumer. That is, each combination of
A and B on the curve yields the same total
utility.

Indifference curves have several important characteristics.

1. Indifference Curves Are Downsloping

An indifference curve slopes downward because more of one product means less of the other if total
utility is to remain unchanged. Suppose the consumer moves from one combination of A and B to another,
say, from j to k in the previous Figure. In so doing, the consumer obtains more of product B, increasing his
or her total utility. But because total utility is the same everywhere on the curve, the consumer must give
up some of the other product, A, to reduce total utility by a
precisely offsetting amount. Thus “more of B” necessitates “less of A,” and the quantities of A and
B are inversely related. A curve that reflects inversely related variables is downsloping.

2. Indifference Curves Are Convex to the Origin

An indifference curve is convex (bowed inward) to the origin and its slope diminishes or
becomes flatter as we move down the curve from j to k to l, and so on. Technically, the slope of an
indifference curve at each point measures the marginal rate of substitution (MRS) of the combi nation of
two goods represented by that point. The slope or MRS shows the rate at which the consumer who
possesses the combination must substitute one good for the other (say, B for A) to remain equally
satisfied. The diminishing slope of the indifference curve means that the willingness to substitute B
for A diminishes as more of B is obtained.

Indifference Map

It is possible and useful to sketch a whole series of indifference curves or an indifference map, as
shown in the next figure. Each curve reflects a different level of total utility and therefore never crosses
another indifference curve.

An indifference map is a set of

indifference curves. Curves farther from
the origin indicate higher levels of total
utility. Thus, any combination of products A
and B represented by a point on I4 has
greater total utility than any combination of
A and B represented by a point on I3, I2, or
I1.

Specifically, each curve to the right of our original curve (labeled 𝐼ଷ in the figure) reflects
combinations of A and B that yield more utility than 𝐼ଷ. Each curve to the left of 𝐼ଷ reflects less total
utility than 𝐼ଷ. As we move out from the origin, each successive indifference curve represents a higher
level of utility. To demonstrate this fact, draw a line in a northeasterly direction from the origin; note that
its points of intersection with successive curves entail larger amounts of both A and B and therefore higher
levels of total utility.

Equilibrium and Tangency

Since the axes in figures of Budget Line (page 42) and Indifference Curve (page 43) are identical,
we can superimpose a budget line on the consumer’s indifference map, as shown in the next figure. By
definition, the budget line indicates all the combinations of A and B that the consumer can attain
with his or her money income, given the prices of A and B. Of these attainable combinations, the
consumer will prefer the combination that yields the greatest satisfaction or utility. Specifically, the
utility-maximizing combination will be the combination lying on the highest attainable indifference curve.
It is called the consumer’s equilibrium position.

10
 The consumer’s equilibrium position. The
consumer’s equilibrium position is represented by
point X, where the black budget line is tangent
to indifference curve I3. The consumer buys 4
units of A at $1.50 per unit and 6 of B at $1 per
unit with a $12 money income. Points Z and Y
represent attainable combinations of A and B
but yield less total utility, as is evidenced
by the fact that they are on lower indifference
curves. Point W would entail more utility than X,
but it requires a greater income than the $12
represented by the budget line.

Based on the above figure, the consumer’s equilibrium position is at point X, where the budget
line is tangent to I3. Why not point Y? Because Y is on a lower indifference curve, I2. By moving “down”
the budget line—by shifting dollars from purchases of A to purchases of B—the consumer can attain an
indifference curve farther from the origin and thereby increase the total utility derived from the same
income. Why not point Z? For the same reason: Point Z is on a lower indifference curve, I1. By moving
“up” the budget line—by reallocating dollars from B to A—the consumer can get on higher indifference
curve I3 and increase total utility.

How about point W on indifference curve I4? While it is true that W would yield a greater total utility
than X, point W is beyond (outside) the budget line and hence is not attainable by the consumer.
Point X represents the optimal attainable combination of products A and B. Note
that at the equilibrium position, X, the definition of tangency implies that the slope of the highest
attainable indifference curve equals the slope of the budget line. Because the slope of the
indifference curve reflects the MRS (marginal rate of substitution) and the slope of the budget line
𝑃
is , the consumer’s optimal or equilibrium position is the point where MRS = ஻ൗ𝑃 .
஺ ஺
𝑃஻
ൗ𝑃

Note that when we compare the equilibrium situations in the two theories, we find that in
𝑃
the indifference curve analysis the MRS equals ஻ൗ𝑃 at equilibrium; however, in the marginal-
஺
𝑃
utility approach the ratio of marginal utilities equals ஻ൗ𝑃 . We therefore deduce that at equilibrium
஺
the MRS is equivalent in the marginal-utility approach to the ratio of the marginal utilities of the
𝑀𝑈஺
last purchased units of the two products (If we begin with the utility-maximizing rule, ൗ𝑃 =
஺
𝑀𝑈஻ 𝑃஻
ൗ𝑃 , and then multiply through by 𝑃஻ and divide through by 𝑀𝑈஺ , we obtain ൗ𝑃
஻
𝑀𝑈஻
=
஺
𝑃஻ൗ
ൗ𝑀𝑈 . In indifference curve analysis we know that at the equilibrium position MRS = 𝑃
஺ 𝑀𝑈஻ .
Hence, at equilibrium, MRS also equals ൗ𝑀𝑈 ). ஺
஺

The Derivation of Demand Curve

We noted earlier that with a fixed price for A, an increase in the price of B will cause the bottom of the
budget line to fan inward to the left. We can use that fact to derive a demand curve for product B. In
the next figure (a) we reproduce the part of the above figure that shows our initial consumer equilibrium at
point X. The budget line determining this equilibrium position assumes that money income is $12 and
that 𝑃஺ = $1.50 and 𝑃஻ = $1. Let us see what happens to the
equilibrium position when we increase 𝑃஻ = $1.50 and hold both money income and the price of A
constant. The result is shown in figure a. The budget line fans to the left, yielding a new
equilibrium point X’ where it is tangent to lower indifference curve I2. At X’ the consumer buys 3 units of
B and 5 of A, compared with 4 of A and 6 of B at X. Our interest is in B, and we now have sufficient
information to locate two points on the demand curve for product B. We know that at equilibrium point X
the price of B is $1 and 6 units are purchased; at equilibrium point X’ the price of B is $1.50 and 3 units
are purchased.

Deriving the demand curve.

(a) When the price of product B is

increased from $1 to $1.50, the
equilibrium position moves from X to
X', decreasing the quantity demanded of
product B from 6 to 3 units.

(b) The demand curve for product B is

determined by plotting the $1–6-unit
and the $1.50–3-unit price-quantity
combinations for product B.

These data are shown graphically in Figure b as points on the consumer’s demand curve for B.
Note that the horizontal axes of Figures a and b are identical; both measure the quantity demanded of B.
We can therefore drop vertical reference lines from Figure a down to the horizontal axis of Figure
b. On the vertical axis of Figure b we locate the two chosen prices of B. Knowing that these prices yield
the relevant quantities demanded, we locate two points on the demand curve for B. By simple
manipulation of the price of B in an indifference curve–budget line context, we have obtained a
downward-sloping demand curve for B. We have thus again derived the law of demand assuming
“other things equal,” since only the price of B was changed (the price of A and the consumer’s
money income and tastes remained constant). But, in this case, we have derived the demand curve
without resorting to the questionable assumption that consumers can measure utility in units called
“utils.” In this indifference curve approach, consumers simply compare combinations of products A and
B and determine which combination they prefer, given their incomes and the prices of the two products.
Exercise 6
1. Assume that data in the accompanying table give an indifference curve for Amrey. Graph this curve,
putting A on the vertical axis and B on the horizontal axis. Assuming that prices of A and B are 1.50 and
1.00 peso, respectively, and that Amrey has 24 pesos to spend, add his budget line to your graph. What
combination of A and B will Amrey purchase? Does your answer meet the MRS=MRMS for equilibrium?

Combination Units of A Units of B A

16 6
B 12 8
C 8 12
D 4 24

2. Columns 1 through 4 in the table show the marginal utility, measured in utils, that Melcah would get by
purchasing various amounts of products A, B, C, and D. Column 5 shows that marginal utility Melcah gets
from saving. Assume that prices of A, B, C, and D are P18, P6, P4, and P24, respectively, and that Melcah
has an income of P106.

Column 1 Column 2 Column 3 Column 4 Column 5

Units of Number of
MU Units of B MU Units of C MU Units of D MU
A Peso Saved
MU

1 72 1 24 1 15 1 36 1 5
2 54 2 15 2 12 2 30 2 4
3 45 3 12 3 8 3 24 3 3
4 36 4 9 4 7 4 18 4 2
5 27 5 7 5 5 5 13 5 1
6 18 6 5 6 4 6 7 6 ½
7 15 7 2 7 3½ 7 4 7 ¼
8 12 8 1 8 3 8 2 8 1/8

a. How many quantities of A, B, C, and D will Melcah purchase in maximizing her utility?
b. How many pesos will Melcah choose to save? How many utils will be her maximum utility?
c. Check your answers by substituting them into the algebraic statement of the utility – maximizing rule.

3. Graph the following completely: (Good A in X axis and Good B in Y axis)

a. Draw an indifference curve of perfectly substitute goods b.

Draw an indifference curve of complementary goods
c. Draw an indifference map with 4 levels of utilities
(Draw the shifting of the original budget line using the situations given from d to i)
a. Real income of the consumer increased b.
Real income of the consumer decreased c. Price
of both goods increased
d. Price of both goods decreased
h. Price of Good A increase but price of Good B is constant i.
Price of Good A increase and price of Good B decrease
REFERENCES

McConnel, C. & Brue, S. (2008). Economics: Principles, Problems, and Policies. 17th Edition,
McGraw Hill-Irwin.

McConnel, C. Brue, S. & Flynn, S. (2012). Microeconomics: Principles, Problems, and Policies.
19th Edition, McGraw Hill-Irwin.

McConnel, C. Flynn, S., Brue, S. & Grant (2012). Microeconomics. 2nd Brief Edition, McGraw Hill-
Irwin.

Nicholson, W. (2002). Microeconomic Theory: Basic Principles and Extensions. 8th Edition.
Southwestern Publishing.

Pindyck, R. & Rubinfeld, D. (2005). Microeconomics. 6th Edition, Prentice Hall.

Schiller, B. (2003). The Microeconomy Today. 9th Edition. New York: McGraw-Hill/Irwin.

Slavin, S. (2006). Microeconomics. 7th Edition. Burr Ridge: Illinois: McGraw-Hill/Irwin.