ECONOMICS ASSIGNMENT
1A
• The simple meaning of ‘utility’ is ‘usefulness’. In economics utility is
the capacity of a commodity to satisfy human wants. Utility is the
quality in goods to satisfy human wants. Thus, it is said that “Wants
satisfying capacity of goods or services is called Utility. Also
utility is a term in economics that refers to the total satisfaction received
from consuming a good or service. Economic theories based on rational
choice usually assume that consumers will strive to maximize their utility.
The economic utility of a good or service is important to understand,
because it directly influences the demand, and therefore price, of that good
or service. In practice, a consumer's utility is impossible to measure and
quantify. However, some economists believe that they can indirectly
estimate what is the utility for an economic good or service by employing
various models.
1B,
• law of diminishing marginal utility says that the marginal utility from
each additional unit declines as consumption increases. it states
that all else equal, as consumption increases, the marginal utility
derived from each additional unit declines. Marginal utility is the
incremental increase in utility that results from the consumption of
one additional unit. "Utility" is an economic term used to represent
satisfaction or happiness. The marginal utility can decline into
negative utility, as it may become entirely unfavorable to consume
another unit of any product. Or the marginal utility may decrease into
negative utility, as it may become entirely unfavorable to consume
another unit of any product.
1C,
• A budget line shows the combinations of two products that a consumer can
afford to buy with a given income – using all of their available budget.It
also mean that The budget line is a graphical delineation of all possible
combinations of the two commodities that can be bought with provided
income and cost so that the price of each of these combinations is
equivalent to the monetary earnings of the customer.
1D,
•
A rational consumer is considered to be that person who makes rational
consumption decisions. In other words, the consumer who makes his
choices after considering all the other alternative goods (and services)
available in the market is called a rational consumer. Economists argue
that a utility maximizing individual is noted as a 'rational consumer' in the
market. Someone is considered a 'rational consumer' because they are
focused on their own self-interest; they maximize their utility in order to
gain the most for themselves. A rational consumer is considered to be that
person who makes rational consumption decisions.
1E
• The budget constraint represents a consumer's income, and
optimisation occurs when consumers are able to reach the highest
indifference curve possible, for their given level of income. ... In other
words, high indifference curves give a high level of satisfactionWe live in a
world of scarcity. In other words, what we want outweighs what we can
attain. Why? Well, we have limited resources – money, options, time, etc.
When you’re making choices about what to buy, your budget, the prices of
goods and services, and your preferences all act as constraints.
To better illustrate this idea, let’s return to our simple example of pizzas and
coffees. Let’s also assume that you like both pizza and coffee and want
more of both. If you were to look at a map of your indifference curves for
these goods, you’d see that you get the most utility on the indifference
curve farthest from the origin. But, since scarcity is our reality, that level of
utility is probably not achievable.
Combining your budget constraint with your indifference curves can help
you see how to get maximum utility given your resources. Any point at
which your budget constraint lies tangent to an indifference curve is an
optimal combination of pizzas and coffees. Why is it optimal? Two simple
reasons: 1) You can afford it, and 2) it will give you the most happiness
(aka utility).
1F,
• An indifference curve shows a combination of two goods that give a
consumer equal satisfaction and utility thereby making the consumer
indifferent. Standard indifference curve analysis operates on a simple
two-dimensional graph. Each axis represents one type of economic
good. Along the indifference curve, the consumer is indifferent
between any of the combinations of goods represented by points on
the curve because the combination of goods on an indifference curve
provide the same level of utility to the consumer. Along the curve, the
consumer has an equal preference for the combinations of goods
shown—i.e. is indifferent about any combination of goods on the
curve.
Typically, indifference curves are shown convex to the origin, and no two
indifference curves ever intersect.
1G,
• An Indifference Map is a set of Indifference Curves. It depicts the complete
picture of a consumer's preferences. The following diagram shows an
indifference map consisting of three curves: We know that a consumer is
indifferent among the combinations lying on the same indifference curve
Map is a set of Indifference Curves. It depicts the complete picture of a
consumer’s preferences
• 1H,
• In economics, the marginal rate of substitution (MRS) is the amount of a
good that a consumer is willing to consume compared to another good, as
long as the new good is equally satisfying. MRS is used in indifference
theory to analyze consumer behavior. The marginal rate of substitution
is the willingness of a consumer to replace one good for another
good, as long as the new good is equally satisfying.The marginal
rate of substitution is the slope of the indifference curve at any given
point along the curve and displays a frontier of utility for each
combination of "good X" and "good Y."When the law of diminishing
MRS is in effect, the MRS forms a downward, negative sloping,
convex curve showing more consumption of one good in place of
another.
2
The utility approach to consumer demand theory is based on the assumption of
cardinal utility, while the indifference curve approach is based on ordinal utility.
Both approaches are good enough in different cases, but the ordinal utility
approach is better, because it uses ranks, according to which some choices are
more preferable than other. Ordinal utility theory states that while the utility of a
particular good or service cannot be measured using a numerical scale bearing
economic meaning in and of itself, pairs of alternative bundles (combinations) of
goods can be ordered such that one is considered by an individual to be worse
than, equal to, or better than the other. This contrasts with cardinal utility theory,
which generally treats utility as something whose numerical value is meaningful
in its own right. It seemed base on qualitative measurement.
3,
Qx 0 1 2 3 4 5 6 7
TUx 0 6 16 22 26 29 29 27
MUx - 6 10 6 4 3 0 -2
a. The marginal utility schedule is calculated above using the formula MUx =\
frac{\Delta TUx}{\Delta Qx}MUx=ΔQxΔTUx .
b. The total utility curve is upward-sloping curve, and the marginal utility increases
first till Qx =2 and then decreases and becomes negative at Qx =7.
c. The law of diminishing marginal utility begins to operate at Qx = 3.
d. The saturation point is at Qx = 6, at this point MUx = 0 and TUx starts to
decrease.
The marginal utility (MUx) = \frac{\triangle TUx}{\triangle Qx}△Qx△TUx
The marginal utility schedule is as below:
b.). The total and the marginal utility schedules graph are as below:
tebilun izi ga azgebiw..
c.). The law of diminishing marginal utility begins to operate at Qx = 3. This is
where it starts decreasing.
graphun demo
yetesalewun maletizih
newga azgebiw...be iskirbito
d.). The saturation point is at Qx = 6. This is the point where MUx = 0 and Tux
starts to decrease.
4
Given the following marginal utility schedule for good X and good For the
individual,and given that the price of X and the price of Y are both $1, and
that the individual spends all income of $7 on X and Y,
Q 1 2 3 4 5 6 7
MUX 15 11 9 6 4 3 1
MUY 12 9 6 5 3 2 1
a. The individual should purchase such amount of X and Y to maximize
utility, for which:
MUX/PX = MUY/PY and PX*X + PY*Y = I, so:
For MUX = MUY = 6, X = 4, Y = 1, I = 1*4 * 1*3 = 7, so the utility is
maximized.
b. The condition for constrained utility maximization is satisfied, because
the individual at his or her optimum spends all his income of $7, as we
proved in a.
c. Total utility received when he or she maximizes utility is: TUX + TUY =
(15 + 11 + 9 + 6) + (12 + 9 + 6) = 68.
If he or she spent all income on X or Y, then:
TUX = 15 + 11 + 9 + 6 + 4 + 3 + 1 = 49,
TUY = 12 + 9 + 6 + 5 + 3 + 2 + 1 = 39.
5a,
The main difference between total and marginal utility is that total
utility refers to the total satisfaction received by the consumer
from consuming different units of a commodity while the marginal
utility, connotes the additional utility derived from the
consumption of the extra unit of a commodity.
BASIS FOR TOTAL UTILITY MARGINAL UTILITY
COMPARISON
Meaning Total Utility means total Marginal Utility means the
benefit obtained by a amount of utility a person
person from gains from the consumption
consumption of goods of each successive unit of a
and services. commodity.
Result Suffers from diminishing Declines for each additional
returns. unit consumed.
The significant differences between total and marginal utility are
explained in the points given below:
• Total Utility means overall benefit obtained by a person from
consumption of goods and services. Marginal Utility means
the amount of utility a person gets from the consumption of
each successive unit of a commodity.
• In general, the total utility increases as more of a commodity
is consumed. As against this, the marginal utility decreases
with each additional unit of a commodity consumed.
• There is a certain saturation point of satisfaction, where the
consumer no longer gains satisfaction with the consumption
of the commodity, once that point has reached. This shows
that total utility suffers from decreasing returns. Unlike
marginal utility, which declines with each additional unit of
the commodity consumed.
5b,
According to the Law of Diminishing Marginal Utility,
marginal utility of a good diminishes as an individual
consumes more units of a good. In other words, as a
consumer takes more units of a good, the extra utility or
satisfaction that he derives from an extra unit of the good
goes on falling.
It should be carefully noted that is the marginal utility and
not the total utility than declines with the increase in the
consumption of a good. The law of diminishing marginal
utility means that the total utility increases but at a
decreasing rate.
“The additional benefit which a person derives from a
given increase of his stock of a thing diminishes with every
increase in the stock that he already has.”
This law is based upon two important facts. Firstly, while
the total wants of a man are virtually unlimited, each
single want is satiable. Therefore, as an individual
consumes more and more units of goods, intensity of his
want for the goods goes on falling and a point is reached
where the individual no longer wants any more units of the
goods. That is, when saturation point is reached, marginal
utility of goods becomes zero. Zero marginal utility of
goods implies that the individual has all that he wants of
the goods in question.
The second fact on which the law of diminishing marginal
utility is based is that the different goods are not perfect
substitutes for each other in the satisfaction of various
particular wants. When an individual consumes more and
more units of a goods, the intensity of particular want for
the goods diminishes but if the units of that goods could be
devoted to the satisfaction of other wants and yield as
much satisfaction as they did initially in the satisfaction of
the first want, marginal utility of the good would not have
diminished.
It is obvious from the above that the law of diminishing
marginal utility describes a familiar and fundamental
tendency of human nature. This law has been arrived at by
introspection and by observing how people behave.
Example
Suppose a person who does not have shoes to go to work and decides to
buy new ones. This person has a positive initial marginal utility. As you
wear your shoes you will be buying more and more. Later your degree of
satisfaction will be less because of the accumulation of more goods.
Therefore, the marginal utility will become constant in time and then
become decreasing. In a capitalist society, this theory is very common since
society tends to accumulate and oblivion of many goods that are
purchased.
Another example can be found i.e. children are fond of toys. However,
when they have more toys, they stop playing with antique toys losing their
interest in playing with them. In this case, the marginal utility does not
refer to a material value and their economic quantification. Hence, the
marginal utility of goods for each consumer decrease when each extra unit
of the goods consumed cause a smaller increase.
