Question

13. In economics, an individual person is assumed to be rational and self-interested seeking to maximize utility in various ways including from the consumption of goods and services. What one does is to achieve a certain goal. So he/she is rational. Why one does is to feel good or happy. So he/she is a self-interested utility seeker. The term 'utility' means satisfaction or happiness. Utility is difficult to quantify. But for purposes of illustration we assume that people can measure satisfaction with units called 'utils'. For example, a particular consumer may get 100 units of satisfaction from a smoothie, 10 utils of satisfaction from a candy bar, and 1 unit of satisfaction from a stick of gum. Marginal utility is the extra utility a consumer realizes from an additional unit of the product for example, from the 6th unit. Alternatively, marginal utility is the change in total utility that results from the consumption of 1 more unit of the product. The theory of consumer behavior rests squarely on the law of diminishing marginal utility. This principle says that added satisfaction declines as a consumer acquires additional units of a given product. Although consumer wants in general may be insatiable, wants for a particular items can be satisfied. In a specific span of time over which consumers' tastes remain unchanged, consumers can obtain as much of a particular good or service as they can afford. But the more of that product they obtain, the less they want. The table below demonstrates the relation between total utility, marginal utility and the law of diminishing marginal utility.

Answer 1

Answer to problem a.

The total utility, in this case, is 28 utils. As can be seen from the table that after the consumption of 6 units the total utility is 30 but if the consumer consumes one more additional unit (7th) the additional utility that s/he will derive will be -2 hence reducing the total utility by 2 (30-2).

Answer to problem b.

Following the same steps, the marginal utility of 4th taco will be total utility derived after consuming 4 units of good minus the total utility derived from consuming 3 units of goods which in this case is equal to 4 (28-24).

Answer to problem c.

Yes, the demand curve's downward sloping nature is related to the law of diminishing marginal utility. as explained below

Let's analyse it first for a single individual (call him Jhon)

Tacos consumed per meal By Jhon	Price	Total Utility	Marginal Utility
0	15.00	0	-
1	10.00	10	10
2	8.00	18	8
3	6.00	24	6
4	4.00	28	4
5	2.00	30	2
6	0.00	30	0
7	0.00	28	-2

Jhon demand curve - Let's assume the restaurant has priced the taco at $15. which Jhon cannot afford. after the price is dropped to $10 the demand for the first taco will arise and Jhon will buy his 1 taco and derive total utility of 10. following the same table if the price is dropped further @ $8 he will buy 2 tacos and derive a total of 18 utils and so on.

Let's assume the utility of holding $1 cash is 1. and this is not diminishing.

as can be seen less the price more the consumption. The rationale here is that a utility maximising individual will choose that level of consumption where the marginal utility derived from the consumption of the last unit of the commodity is equal to the marginal utility of holding cash.

In this case, if the restaurant decided to keep the price at $5 Jhon will consume only upto 3rd unit. as the marginal utility from the 4th unit will be 4 utils which will be less than the 5 utils (spending $5) that he needs to spend to buy the 4th taco.

hon's Demand curve 14.00 1200 10.00 8.00 6.00 4.00 2.00 0.00 2.00

Market Demand Curve - let's assume 100 customers form a market and all of them has the same level of utility from cash. The market demand curve will be as follows

Market Demand Curve 14.00 1200 10.00 8.00 6.00 4.00 2.00 0.00 2.00 200 300400500600 "700 800

Hence it can be seen that the law of diminishing marginal utility is related to the downward sloping demand curve.