Question

Please answer the following questions:

1) Explain the relationship between total utility, marginal utility, and average utility.
2) What is consumer optimum?
3) How do you calculate consumer optimum?
4) Solve the following:
Q: 0, 1, 2, 3, 4, 5
Total Utility: 0, 60, 130, 190, 230, 250
Calculate her Marginal Utility at Q 2?
5) Marginal Utility at Q 4?
6) Average Utility at Q 3?
7) Average Utility at Q 5?

Answer 1

Total Utility is total satisfaction from all units of consumption of a good. TU= ΣMU

Marginal Utility is additional satisfaction from additional unit of consumption of a good. MU = TUn - TUn-1

Average Utility is average satisfaction per unit of output consumed of a good. AU = TU/N

1. TU Increases at increasing rate : MU Increases

TU increases at decreasing rate : MU decreases

TU is maximum : MU is zero

TU is falling : MU is negative

MU > AU : AU increase

MU < AU : AU decrease

2. Consumer Optimum is where consumer gets maximum satisfaction from consumption of certain units of a good, any deviation from that yields lesser satisfaction from the optimum point.

3. Consumer Optimum is where : Marginal Utility of the good = Price of the good.

4. Q 0 1 2 3 4 5

TU 0 60 130 190 230 250

MU at 4th unit = TUn - TUn-1 = TU4 - TU3 = 230 - 90 = 40

AU at 3rd unit = TU / N = 190/ 3 = 63.3

AU at 5th unit = TU / N = 250/5 = 50