Theory question 101
Theory of Consumer BehaviourThe table below shows Mr. Y's schedule of total utility for oranges and mangoes. The prices of oranges and mangoes are set at $1.00 each. Mr. Y has $10.00 to spend on the goods. Use the information contained in the table to answer the questions that follow.
Oranges | Total utility | Mangoes | Total utility
1 | 100 | 1 | 50
2 | 190 | 2 | 95
3 | 270 | 3 | 135
4 | 340 | 4 | 170
5 | 400 | 5 | 200
6 | 450 | 6 | 225
7 | 490 | 7 | 245
8 | 520 | 8 | 260
(a) Calculate the marginal utility for all the levels of consumption for the goods.
(b) At equilibrium, how many (i) oranges, (ii) mangoes will the consumer buy?
(c) (i) State the law of diminishing marginal utility. (ii) State the marginal condition for utility maximization.
Show the model answer
(a) MU = TUn − TUn−1
Oranges: 100, 90, 80, 70, 60, 50, 40, 30
Mangoes: 50, 45, 40, 35, 30, 25, 20, 15
(b) Spend $10 so that MU per dollar is equal: (i) 7 oranges (MU 40); (ii) 3 mangoes (MU 40); 7 + 3 = 10 dollars.
(c)(i) As a consumer takes more and more units of a commodity in a given period, the extra satisfaction from each additional unit eventually falls.
(ii) MUO/PO = MUM/PM (and all income is spent).
Equilibrium is where the last dollar spent on each good gives the same marginal utility and the whole $10 is used.