Theory question 102
Theory of Consumer BehaviourThe utility schedule of a consumer for a brand of ice cream is shown in the table below. Use the information to answer the questions that follow:
Units Consumed (Q) | Total Utility (TU) | Marginal Utility (MU)
0 | 0 | –
1 | 10 | 10
2 | 19 | R
3 | P | 6
4 | 30 | 5
5 | 31 | S
6 | Q | 0
7 | 29 | −2
(a) Calculate the values of P, Q, R and S.
(b) Given that the price of ice cream is $1.00 per unit, at what level of consumption is the consumer in equilibrium? Explain your answer.
(c) Using a graph sheet, draw the marginal utility curve.
(d) State the law of diminishing marginal utility.
Show the model answer
(a) P = 19 + 6 = 25; Q = 31 + 0 = 31; R = 19 − 10 = 9; S = 31 − 30 = 1
(b) At 5 units, where MU (1) equals the price ($1.00, taking 1 util as worth $1): buying the 5th unit gives satisfaction just equal to what is paid; a 6th unit gives MU 0, less than the price.
(c) Units on the horizontal axis, MU on the vertical axis; plot 10, 9, 6, 5, 1, 0, −2 for units 1–7 and join: a downward-sloping curve that cuts the horizontal axis at 6 units and goes below it at 7.
(d) As a consumer takes more and more units of a commodity in a given period, the additional satisfaction from each extra unit eventually decreases.
MU = change in TU; equilibrium for one good is where MU = price.