Theory question 101
Theory of Consumer BehaviourSection A: answer one question only from this section.
Utility Schedule
Quantity of goods consumed: 0, 1, 2, 3, 4, 5, 6
Total utility: 0, 10, 16, ?, ?, 23, 23
Marginal utility: 0, 10, ?, 4, ?, 1, ?
(a) Complete the above utility schedule (b) Draw the marginal utility curve (c) (i) At what quantity does TU equal MU? (ii) What is the value of MU when TU reaches the maximum? (iii) What happens to the values of TU as the quantity consumed increases? (iv) What happens to the values of MU as the quantity consumed increases?
Show the model answer
(a) MU = change in TU
MU at 2 units = 16 − 10 = 6
TU at 3 units = 16 + 4 = 20
TU at 4 units = 23 − 1 = 22, so MU at 4 units = 22 − 20 = 2
MU at 6 units = 23 − 23 = 0
(b) Quantity on the horizontal axis, MU on the vertical axis: MU falls from 10 to 6, 4, 2, 1 and reaches 0 at 6 units (a downward-sloping curve)
(c)(i) TU equals MU at 1 unit (10 = 10) (also at 0 units)
(ii) MU is zero when TU is at its maximum
(iii) TU increases at a decreasing rate, reaches a maximum (23) and then stays constant
(iv) MU diminishes as more is consumed (law of diminishing marginal utility)
Fill the gaps using MU = change in TU, working forwards and backwards.