Utility Theory:
Utility is a measure of satisfaction. Answer Questions # 1, # 2 and below for a particular consumer based upon the following table.
Assume that the consumer may purchase only the four goods, a, b, c and d during the time period. The price of each unit of each good is as follows: a = $ 2, b = $ 5, c = $ 10 and d = $ .50.
Total Utility Gained From Consuming
Units of ________ Units Of Each Good________
Each Good a b c d
1 80 250 550 80
2 140 450 1050 120
3 190 600 1500 140
4 230 725 1900 150
5 260 825 2200 155
6 280 900 2400 157
1. Calculate the marginal utility of each additional unit of each good, a, b, c and d from the information in the table above.
2. Calculate the marginal utility of the last dollar spent for each unit of each good, a, b, c and d determined above.
3. If this consumer’s point of consumer equilibrium is when the marginal utility of the last dollar spent for all goods is 20, how many units of each good will this consumer purchase if the total income available is $ 95?
4. Briefly explain the Law of Diminishing Marginal Utility.
5. Briefly explain the Rule of Consumer Equilibrium and explain the point where total utility is maximized (point of consumer equilibrium).