Question

100 pts Question 1 Write an essay that answers the following questions about utility theory. (In your essay, select the appropriate graphs from the file of graphs found at: https://drive.google.com/file/d/1pYKDpKZ5WQYZCICKYeWJ9Z vgeVO v/view? usp=sharinge. Be sure to explain whatever graphs you refer to in terms of your overall essay) 1. How is utility measured? 2. Explain the difference between total utility and marginal utility. 3. Explain the law of diminishing marginal utility. 4. What problem with utility theory is solved by the indifference curve? 5. What are the four assumptions behind indifference curves? 6. Select the graph which would represent an individual's indifference curve for two goods, good 1 and good 2, for an individual who likes both goods, with all four assumptions met. Based on the graph you chose, write the formula for the budget line and the slope of the indifference curve, or marginal rate of substitution 7. How do we know when the consumer has maximized utility? What condition must be met? At which point on the graph does that occur? HTML Editor BTWA-A-TEX 9. 12pt Paragraph

answer all the questions in a type format thank you

Answer 1

1. Utility can be measured by both Cardinal as well as ordinal approach. The utility is measured in utils, it is the satisfaction which consumer derives from the consumption of a commodity.

2. Total Utility is the total satisfaction received from the consumption of the total quantity of a given commodity whereas the Marginal Utility is the additional utility derived from the consumption of an additional unit of a commodity.

UNITS	TU	MU
1	10	-
2	20	10
3	32	12
4	40	8

TU_{n =} MU_1.......+MU_n

MU_n= TU_n- TU_n-1

3. Law of diminishing marginal utility states that as we go on consuming more and more units of a single commodity, the Marginal utility initially increases, then decreases and then becomes negative.

4. The Indifference curve is the ordinal utility where all the combinations on the same Indifference Curve give the same level of satisfaction. So the Indifference curve provides the combinations of goods which give the same level of satisfaction.

5. Assumptions of Indifference Curves are as follows :

• The indifference curve are always convex to the origin.
• Higher the Indifference curve higher will be the level of satisfaction.
• Two Indifference curve never intersects each other.
• Indifference curves are always downward sloping.

6. The formula for the slope of the Indifference Curve is Marginal Rate of Substitution: MU_x/ MU_y. The formula for the slope of Budget Line is -P_x/ P_y.

GOODY 6000K

This is the shape of Indifference curve which represents that consumer likes both the commodities.

7. The point where the consumer's satisfaction gets maximized is the point where both the Budget Line and Indifference Curve becomes tangent to each other. It is the point where the slope of the budget line becomes equal to the slope of the Indifference Curve.

MRS= P_X / P_Y

GOODY Slope of Budget Line aequalis GOOOX