Using Jeremy's Market in MarketSim to understand utility maximization

This page authored by Teri Riley, Youngstown State University. MarketSim was developed by Tod Porter and Kriss Schueller, Youngstown State University.

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This material is replicated on a number of sites as part of the SERC Pedagogic Service Project

Initial Publication Date: May 24, 2010

Summary

The main purpose of Jeremy's Market is to give students an understanding of utility maximization. In the simulation students are in charge of a household and their goal is to maximize the household's utility. Utility is a function of the consumption of two goods and leisure. The simulation is divided into a number of periods. In each period the students must decide how much time to spend producing the two goods and how much time to consume as leisure. Once they have produced the goods, they can consume the goods or offer to trade the goods with other students. Students should use the concepts of production theory and comparative advantage as they make their decisions on what to produce and what to trade. They also need to use the concept of utility maximization to help they decide what to consume.
The simulation can be played either during a class period or outside of class.

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Learning Goals

The goal of the simulation is for students to understand the concepts of diminishing marginal productivity, opportunity cost, comparative advantage, and utility maximization.

Context for Use

The simulation can be used in any size class, but it works best if at least 30 students are playing. The simulation is designed primarily for principles level students. It can be extended to Intermediate Microeconomics classes if more emphasis is placed on the underlying utility and production functions. An instructor will need to spend at least 50 minutes explaining how the simulation works. The simulation lasts for 4 periods. If all the students play the simulation at the same time, the instructor will need to allow for an hour to an hour and a half to complete the simulation. If the students play the simulation outside of class, the instructor can decide how long each period will last.
Students will need to understand utility and production functions before the simulation is introduced.
If the simulation is played outside of class, the instructor will need to allocate at least 10 minutes of class time after each simulation period ends reviewing the results.

Description and Teaching Materials

The simulation can be found at http://marketsim.ysu.edu
The site provides a link to the simulation plus the materials the instructor will need to use the simulation in class. There is an instructors manual, information for the student and a powerpoint presentation that can be used to introduce the simulation to the class.

Teaching Notes and Tips

Instructors need to thoroughly review the program structure with their students. Instructors need to spend time explaining the worksheet because that is the page that students use to plan their strategy. They need to understand that they can use this page to determine how their utility will be affected by trades before they make the trade.
Students should be advised to check the simulation frequently so that they can take advantage of offers that are being made. Students should be warned against waiting until the period is almost over to try to make their decisions.
Students need to be reminded that when they make a trade the goods will go into their stock. They then have to take the action to consume the goods. Students often forget to take that action.
One strategy that students should follow is to make their offers in small quantities. They probably won't find someone who wants to buy a large quantity of either good.