Review Notes - Consumer Choice

- Definitions.

- Total Utility (TU) and Marginal Utility (MU = change in TU/change in Q).

- the law of diminishing Marginal Utility - as consumption of a good increases, ceterus paribus, the marginal utility must eventually decrease. (why is this true?)

- consumer surplus (the difference between the maximum price consumers would have been willing to pay for a good and the price they actually paid for all units of the good purchased - what is consumer surplus graphically?)

- MU/P for a good. What is MU/P?

- Maximizing Utility

- How do you maximize total utility? The rule of equal marginal utilities per dollar spent.

- Predictions. What does the model predict will happen when P increases or P decreases? Is this what happens in the real world?

- What is the relationship between D and MU?