Consumer Preferences

Question 1

We suppose that our abstract ‘consumer’

Answer 1

• knows how much they like each good
• thinks in terms of continuous quantities
• is consistent in their preferences
• always prefers more to less

Can we represent these preferences numerically?

Question 2

Utility (definition)

Answer 2

The amount of satisfaction/happiness derived from consuming

Question 3

What are the units of utility?

Answer 3

There is not any ‘natural’ unit by which we measure satisfaction/happiness, but we can measure it in relative terms. The units might not have an absolute meaning, but they can still represent the relative desirability of one consumption choice compared with another.

Question 4

Utility Example

Answer 4

For example, suppose that choice A is to consume five apples and one orange, while choice B is to consume two apples and two oranges. If we state that utility (A) = 6 and utility (B) = 10, we prefer B to A. If utility (A) = utility (B) then we are indifferent between the two options

Question 5

Marginal Utility (definition)

Answer 5

Marginal utility refers to the change in utility corresponding to a very small change in quantity.
This is a useful concept when we consider small changes in behaviour and consumers trying to make the best choice.

Question 6

Marginal Utility example

Answer 6

Suppose that we were considering two consumption possibilities which differed in quantity by a very small amount, e.g. a chocolate bar weighing three-and-one-half ounces and a chocolate bar weighing three-and-three-quarter ounces. Even though the difference is small, we could still express a preference (presumably for the heavier bar) and this would take the form of attaching a higher utility to the heavier bar

Question 7

Marginal Utility (definition)

Why is it useful?

Answer 7

refers to the change in utility corresponding to a very small change in quantity

This is a useful concept when we consider small changes in behaviour and consumers trying to make the best choice