ECO101H1 Lecture Notes - Lecture 10: Marginal Utility, Utility, Indifference Curve

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The theory of consumer choice (used to derive the law of downward-sloping demand) Total utility = total satisfaction to person from consumption of product. Marginal utility = additional satisfaction (change in total utility) from consumption of one more unit of product. Principle of diminishing marginal utility: as a person consumes more of a good, the marginal utility of the good declines. Observations: tu increase with additional consumptions, mu decreases with additional consumption. Maximize total utility, given budget (income) constraint. Allocate income so that the marginal utility of the last unit of each good consumed, divided by its price, is the same for all consumed goods. Observations: straightforward to show using calculus (2nd year, motivate with example (1st year) Mu (good 1) / p (good 1) = mu (good 2) / p (good 2) = for all. Shows that if consumer is following this rule, it is not possible to obtain higher level of utility, given the consumer"s budget constraint.

Related Questions

Microeconomics Four-part multiple choice question with an explanation. Give a short explanation for each part regarding how your answer is computed or why your answer is correct.

Part A.

Para mi volunteers at a homeless shelter. It takes a lot of her time, and thus she sometimes takes off time from her job to do the volunteer work. Parami's behavior can be explained by:

	overconfidence.
	a framing bias.
	altruism.
	overvaluing the present relative to the future.

Part B.

Indifference curves cannot be concave to the origin because:

	consumers generally will prefer to have more of a good than less of a good.
	the satisfaction consumers get from consuming additional units of a good decline.
	the substitution effect holds across indifference curves.
	consumers must give up more of one good to obtain more of another good.

Part C.

Marginal utility analysis and indifference curve analysis are both used to:

	compute comparative advantage.
	derive supply curves.
	derive demand curves.
	analyze the total revenue.

Part D.

Indifference curves:

	represent a set of product bundles to which a consumer is indifferent.
	slope up and to the right.
	show the difference between the marginal utilities of two different goods.
	are concave to the origin.

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ECO101H1 Lecture Notes - Lecture 10: Marginal Utility, Utility, Indifference Curve

ECO101H1 Full Course Notes

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