Page 69 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes 5.6 Keywords

Average utility: utility derived from per unit of the commodity

Cardinal measure of utility: Utility is a measurable and quantifi able.
Marginal utility: Utility derived from every next unit.
Total utility: The aggregate level of satisfaction or fulfillment that a consumer receives through

the consumption of a specific good or service
Utility: An economic term referring to the total satisfaction received from consuming a good or
service.

5.7 Self Assessment

State whether the following statements are true or false:

1. With more units of consumption total utility increases and marginal utility also increases.
2. The total utility reaches a maximum value when marginal utility approaches zero.
3. The law of demand can be derived from the law of diminishing marginal utility.
4. Almost all the goods in a market are related goods either by way of complementarity or
substitutability.
5. The traditional marginal utility analysis ignored the income – effect assumption of constant
marginal utility of money spent.

Fill in the blanks:
6. The total utility reaches a maximum value, when marginal utility approaches...........
7. The goal of consumption is to maximize ................ .
8. The law of diminishing marginal utility assumes constant marginal utility of ...........

9. Utility is measured in fictional units called…………….

10. A blanket is made to protect people from cold. This is ……………..related utility.

5.8 Review Questions

1. Examine how the concept of Diminishing Marginal Utility can help to explain the downward
slope of the demand graph.
2. Suppose Charlie Parker CDs cost $10 apiece and Lester Young CDs cost $5 apiece. You
have $40 to spend on CDs. The marginal utility that you derive from additional CDs is as
follows:
# of CDS ----------- Charlie Parker --------- Lester Young
Have 0 buy number 1 ----------- 60 ---------- 30
Have 1 buy number 2 ------------ 40 ---------- 28

Have 2 buy number 3 ----------- 30 ---------- 24
Have 3 buy number 4 ------------ 20 --------- 20
Have 4 buy number 5 ------------ 10 --------- 10

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