#AP Microeconomics: Utility Maximization - Your Night-Before Guide

Hey there, future AP Microeconomics master! Let's get you prepped and confident for tomorrow's exam. We're diving into utility maximization, a core concept that's all about making the best choices with your money. Think of it as your personal guide to 'bang for your buck'! Let's get started!

#Unit 2: Consumer Choice - Maximizing Your Satisfaction

# Introduction to Utility Maximization

• Utility is just a fancy word for satisfaction. As consumers, we aim to maximize our utility, getting the most 'bang for our buck'.
• Marginal Utility (MU) is the additional satisfaction you get from consuming one more unit of a good or service. It's like that extra bit of happiness you get from each additional slice of pizza... until you're full! 🍕
• We're building on Unit 1.5 by now looking at how to maximize utility across multiple goods, not just one. This is the real-world problem you solve daily at the grocery store.
• Key Question: How do we choose the best combination of goods to maximize our satisfaction given a limited budget? This is a common FRQ topic, so pay close attention!

# Rules for Utility Maximization

To make things simple, we'll assume a few things:

• Spend it all: Consumers will spend their entire income.
• Two Goods: We'll focus on choices between two goods (though the concept extends to more).
• 'Bang for your Buck': When choosing what to buy next, consumers will always choose the good with the highest Marginal Utility per Dollar (MU/P). Think of MU/P as the 'bang for your buck'.
• Equilibrium: Utility is maximized when the MU/P of the last unit of each good is equal. This is the golden rule: MU1/P1 = MU2/P2. 💡

# Steps for Solving Utility Maximization Problems

1. Calculate Marginal Utility (MU): If given Total Utility (TU), find MU by subtracting the TU of the previous unit from the current one. If MU is given, skip to the next step.

2. Calculate Marginal Utility per Dollar (MU/P): Divide the MU by the price of the product. This tells you how much satisfaction you get for each dollar spent.

3. Prioritize: Start buying the good with the highest MU/P until your budget is spent.

4. Keep Going: Continue this process until you've spent your entire budget.

# Why MU1/P1 = MU2/P2 Maximizes Utility

• It's All About 'Bang for Your Buck': We use ...