Unit 7.1 and 7.2: Utility/indifference curves/budget lines

Question 1

(7.1) Define utility?

Answer 1

The satisfaction gained from a product

Question 2

Define total utility

Answer 2

This is the satisfaction gained from all units of a product over a particular time period

Question 3

Define marginal utility

Answer 3

This is the satisfaction gained from the last unit of a product over a particular time period

Question 4

Define law of diminishing marginal utility

Answer 4

This is when the quantity consumed by an individual increases, the additional satisfaction gained from each unit decreases

Question 5

Define equi-marginal principle

Answer 5

This is when a rational individual wishes to maximize their total utility and will allocate their expenditure on different products to ensure that the satisfaction gained from the last unit of money spent on each product is the same.
MUx/Px = MUy/Py

Question 6

Explain the link between individual MU and demand curve

Answer 6

• MU can be measured by the total amount of money an individual is willing to spend on a product
• An individual’s demand curve will be similar to the MU curve
• A rational individual who wants to maximize their TU will not purchase a product where the MU is less then price
• An individual will always want to consume where their MU = P

Question 7

Limitations of MU theory

Answer 7

• difficult to find a measure of satisfaction
• some purchases are habit-forming, and MU won’t apply
• enjoyment increases as consumption increases (e.g. collecting post stamps)
• quality and successive units of the goods consumed may vary which will impact the utility

Question 8

(7.2) Define indifference curve analysis

Answer 8

It’s a theory on consumer behavior based on the analysis of individual’s preferences

Question 9

Define indifference curve

Answer 9

It’s a curve showing all the possible combinations of two goods in which a consumer is indifferent