Theory question 105
Theory of Consumer BehaviourSection B (answer four questions only from this section)
(a) Explain the concept of diminishing marginal utility.
(b) How is utility maximized?
Show the model answer
(a) The law of diminishing marginal utility states that as a consumer takes more and more units of a commodity in succession, the extra satisfaction (marginal utility) from each additional unit falls, other things being equal. An example or table showing falling MU with constant or rising total utility.
Assumptions: units are identical, consumed continuously, tastes and income unchanged.
(b) A consumer with one good maximises utility where marginal utility equals price.
With several goods, utility is maximised when the last naira spent on each gives the same marginal utility: MUa/Pa = MUb/Pb = … (equi-marginal principle), with all income spent.
If MUa/Pa > MUb/Pb, the consumer shifts spending from B to A until the ratios are equal.
State the equi-marginal condition in (b).