Utility

A word that can be substituted for utility is

• cost

• price

• satisfaction

• income

Answer explanation

Utility is the satisfaction received from consuming a good or service or a collection of goods and services; satisfaction, sense of wellbeing.

Marginal utility is the

• overall satisfaction from consuming a good

• additional satisfaction from consuming one more unit of a good

• average satisfaction from consuming a good

• the change in satisfaction from consuming 1% more of a good

Answer explanation

The word margin always means a change or the last increment. Marginal utility is the change in total utility derived from a one unit change in consumption of a good.

Total utility can be measured as

• the sum of all marginal utilities

• the sum of all average utilities

• the total revenue spent on goods and services

• the price of a product

Answer explanation

Total utility is the total satisfaction a consumer derives form consumption

The basic hypothesis of utility theory states that as more of a commodity is consumed during a given period of time,

• total utility and marginal utility will both decrease

• total utility and marginal utility will both increase

• total utility will increase but marginal utility will eventually decrease

Answer explanation

Economists assume that the economy is made up of people who would rather have more of something then less. However, beyond a certain point, each additional unit of a good brings less and less satisfaction to a person

How do we calculate marginal utility?

TU: Total Utility

Q: Quantity consumed

• ∆TU/∆Q

• ∆MU/∆Q

• ∆Q/∆TU

• ∆Q/∆MU

Answer explanation

Marginal utility = change in TU/ change in quantity consumed

Which best expresses the law of diminishing marginal utility?

• The more consumption of a product, the smaller is the total and marginal utility

  from the consumption.

• The less consumption of a product, the greater is the total and marginal utility of

  the consumption

• The more consumption of a product, the smaller is the marginal utility from

  consuming an additional unit.

• The more consumption of a produc t, the smaller is the total and marginal utility

  from the consumption.

Answer explanation

Note that your total utility increases when you consume more, but at a lower rate => Thus marginal utility gets smaller as you consume more

Which situation is consistent with the law of diminishing marginal utility?

• The more pizza Henry eats, the more he enjoys another slice.

• The more pizza Henry eats, the less he enjoys another slice

• Henry's marginal utility from eating pizza becomes positive after eating three

  slices.

• Henry's marginal utility from eating pizza reaches a maximum when total utility

  is zero.

Answer explanation

Diminishing marginal return means that the more pizza Henry eats, the less he enjoys another slice

Children who refuse to eat Brussels sprouts at dinner are making the statement that the marginal utility of Brussels sprouts is:

• zero

• negative

• positive, but decreasing.

• less than the total utility

Answer explanation

Feedback: Marginal utility of those children is negative because eating more sprouts would reduce their total utility, so they don't want to eat those vegetables

When marginal utility is decreasing but positive, total utility is:

• increasing at a decreasing rate.

• decreasing at a decreasing rate

• increasing at an increasing rate.

• decreasing at an increasing rate.

Answer explanation

Feedback: Look at the diagram on slide 30

- when MU > 0 but decreasing: TU is increasing but at a decreasing rate

- when MU = 0: TU is maximized

- when MU <0: TU is decreasing

Negative marginal utility means that

• total utility is also negative

• marginal utility is increasing

• the price of the product is increasing as additional units are consumed

• total utility is decreasing as additional units are consumed

Answer explanation

If you were forced to eat ten hamburgers beyond a certain amount, say four, each hamburger consumed will inflect pain instead of pleasure