Can Anybody Explain The Theory Of Consumer Behavior With An Example In Managerial Economics?/

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amber Jhon answered
The theory of consumer behavior in managerial economics focus upon the choices of the consumers and their budget constraints. There are some assumptions of consumer behavior theory like consumers have rational behavior, and clear cut preferences. They are subject to budget constraints and they always response to the price changes in a natural environment.

Now, according to this behavior of consumers, as given by the theory, Utilization Maximization rule is applied. This rules says that the income of consumers should be allocated in such a way that the last dollar spent on each product gives the maximum marginal utility.

For example, if a consumers earns $10, then how this income would be allocated to get Utility Maximization Combination? The prices of the two products A and B are $1 and $2. Now, there can be different combination of the product A and B in $10 but the consumer will go for a combination which will give him the maximum utility.

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