Final answer:
Firm capability is related to how it satisfies the total utility function, which represents the overall satisfaction derived from consuming goods or services within budget constraints. Total utility and diminishing marginal utility are key concepts in understanding consumer choices and a firm's ability to meet those preferences.
Step-by-step explanation:
Firm capability is defined as the dimensions of the total utility function it is able to satisfy. Total utility refers to the overall satisfaction or happiness that a person derives from consuming a combination of goods or services within their budget constraints. For instance, looking at José's situation, where he derives pleasure from collecting T-shirts and watching movies, total utility would be the measure of satisfaction José gains from the combination of these two activities that his budget allows him to pursue. Moreover, in the context of a firm's capabilities, it is crucial to consider not only the total utility but also the concept of diminishing marginal utility, which illustrates how the utility or satisfaction gained from consuming an additional unit of a good or service tends to decline as one consumes more of that good or service.