The Analysis of Consumer Choice

Read the Introduction and these two sections. Attempt the "Try It" problems at the end of each section. Take a moment to read through the stated learning outcomes for this chapter of the text, which you can find at the beginning of each section. These outcomes should be your goals as you read through the chapter.

2. The Concept of Utility

2.6. Case in Point: Changing Lanes and Raising Utility

In preparation for sitting in the slow, crowded lanes for single-occupancy-vehicles, T. J. Zane used to stop at his favorite coffee kiosk to buy a $2 cup of coffee as he headed off to work on Interstate 15 in the San Diego area. Since 1996, an experiment in road pricing has caused him and others to change their ways - and to raise their total utility.

Before 1996, only car-poolers could use the specially marked high-occupancy-vehicles lanes. With those lanes nearly empty, traffic authorities decided to allow drivers of single-occupancy-vehicles to use those lanes, so long as they paid a price. Now, electronic signs tell drivers how much it will cost them to drive on the special lanes. The price is recalculated every 6 minutes depending on the traffic. On one morning during rush hour, it varied from $1.25 at 7:10 a.m., to $1.50 at 7:16 a.m., to $2.25 at 7:22 a.m., and to $2.50 at 7:28 a.m. The increasing tolls over those few minutes caused some drivers to opt out and the toll fell back to $1.75 and then increased to $2 a few minutes later. Drivers do not have to stop to pay the toll since radio transmitters read their FasTrak transponders and charge them accordingly.

When first instituted, these lanes were nicknamed the "Lexus lanes," on the assumption that only wealthy drivers would use them. Indeed, while the more affluent do tend to use them heavily, surveys have discovered that they are actually used by drivers of all income levels.

Mr. Zane, a driver of a 1997 Volkswagen Jetta, is one commuter who chooses to use the new option. He explains his decision by asking, "Isn't it worth a couple of dollars to spend an extra half-hour with your family?" He continues, "That's what I used to spend on a cup of coffee at Starbucks. Now I've started bringing my own coffee and using the money for the toll".

We can explain his decision using the model of utility-maximizing behavior; Mr. Zane's out-of-pocket commuting budget constraint is about $2. His comment tells us that he realized that the marginal utility of spending an additional 30 minutes with his family divided by the $2 toll was higher than the marginal utility of the store-bought coffee divided by its $2 price. By reallocating his $2 commuting budget, the gain in utility of having more time at home exceeds the loss in utility from not sipping premium coffee on the way to work.

From this one change in behavior, we do not know whether or not he is actually maximizing his utility, but his decision and explanation are certainly consistent with that goal.