Question

Please answer the following and PLEASE DO NOT FORGET to develop a two dimensional model of Total Utility for question A.

a)   What is Utility ?   Develop a two dimensional model of Total Utility,, and explain the purpose of this model.

b) What is Marginal Utility? Derive it from Total Utility.

c) Using utility analysis: if one is economically rational, how does he/she allocate his/her choices ?

Answer 1

QUESTION-A

utility represent the units of satisfaction a person has received from the consumption of any good or service.suppose after consuming or drinking a glass of water you are satisfied and you concludes that you received 15 utils of satisfaction this would be known as utility.

TWO DIMENSIONAL MODEL OF TOTAL UTILITY - INDIFFERENCE CURVE-

when a consumer has to choose between two commodities to maximize his utility this approach is very helpful.the main law operating under this concept is known as Marginal rate of substitution and this is the basic reason for the being the indifference curve convex.this concept is ultimately defined by the concept of indifference curve given below-

A B Good c o X GooD - x

as we can analyze there are three points on the convex curve which is known as indifference curve.

• point A implies that person consumes quantity of good y more than quantity of good x
• point B  implies that person consumes quantity of good y and quantity of good x in Equal proportion.
• point C implies that person consumes good x more than quantity of good y

but all the above point gives him equal level of satisfaction.

indifference curve represents the choice of decision making for the two commodities,each and every bundle would give him/her equal amount of choice and person is irrational and indifference about making any choice.

QUESTION-B

marginal utility is the utility derived from the consumption of each additional unit.in general the diminishing marginal rate of substitution operates under this concept which means that if a person would consume another unit of a commodity then he would get lesser amount of satisfaction than the earlier consumed unit.

we can calculate the marginal utility with help of total utility from the following formula-

MU=TU(n)-TU(n-1)

• where MU=marginal utility
• TU(n)=total utility after current consumption
• TU(n-1)=total utility before current consumption

we can understand the concept better with the following example-

UNIT(S) TOTAL UTILITY MARGINAL UTILITY of 8 3 1o 18 25 31 36 7 a 4 5 5

in the above table we have derived the MU with the help of TU.

QUESTION-C

with the two dimensional model as defined in the first answer,a person would be able to make the best use of his budget.we can understand this better in the following example-

7 д MRS atroon B c MRS I О Соо- у

as we can see with the given budget constraint(red linear downward curve)the choice B is under the budget line which means consumer is not maximizing his utility with the given level of income.where point A and point C is at the equal point of budget line therefore to make a suitable decision a person can choose point A and point C rather than choosing point B.