Theory question 101
Theory of Consumer BehaviourFigure 1 below shows the marginal utilities derived from the consumption of different quantities of commodity X which is sold for $4 per unit. Study the graph and answer the questions that follow.
(a) At which level(s) of the consumption of commodity X is: (i) the consumer at the point of saturation; (ii) marginal utility of X (MUx) declining but positive; (iii) total utility of X (TUx) decreasing; (iv) total utility of X (TUx) at maximum?
(b) Identify two laws that the positive segment of the marginal utility curve illustrates.
(c) Explain what the consumer should do in order to achieve equilibrium when consuming: (i) 1 unit of commodity X; (ii) 4 units of commodity X.
Show the model answer
(a)(i) 5 units, where MUx = 0.
(ii) From the 1st to the 4th unit (MU falls from 6 to 1 but stays above zero).
(iii) At the 6th and 7th units (MU is negative).
(iv) At 5 units (MU = 0).
(b) The law of diminishing marginal utility; the law of demand (downward-sloping demand).
(c)(i) At 1 unit MU (6) is greater than the price ($4, taking 1 util as worth $1), so he should consume more until MU = price, i.e. 2 units (MU = 4).
(ii) At 4 units MU (1) is less than the price ($4), so he should consume less, back to 2 units where MU = 4 = price.
Equilibrium for one good is where MU equals price.