We learned that utility for a single good can be thought of as the area under the demand curve to the left of the quantity consumed. That being the case, it might seem at first that the way to maximize utility is to keep purchasing any good for which utility is positive. In other words, behave as if price doesn't matter!

    Suppose we consider the demand curve shown to the right for music CDs. This naive view of utility maximization would mean that when the price is 10 she should purchase 13 CDs, because her utility is positive for all 13 CDs. The yellow shaded area is her utility and it is clear that this area is maximized when she buys 13. If this were how utility maximization worked, it would mean she should buy 13 at any price, if the price were 6, 10 or 14 she would still buy 13 CDs. Since we know price matters, this can't be right!

Copyright © 1995-2004 OnLineTexts.com, Inc. - All Rights Reserved