Utility Flashcards
Q: What is Total Utility?
A: Total Utility is the overall satisfaction or benefit a consumer gains from consuming a certain quantity of goods or services.
Q: What is Marginal Utility?
A: Marginal Utility is the additional satisfaction or benefit a consumer gains from consuming one more unit of a good or service.
Q: What is the Law of Diminishing Marginal Utility?
A: The Law of Diminishing Marginal Utility states that as the consumption of a good increases, the marginal utility derived from each additional unit decreases.
Q: What is the Equi-Marginal Principle?
A: The Equi-Marginal Principle states that a consumer maximizes total utility by allocating income so that the last unit of currency spent on each good provides the same level of marginal utility.
Q: How is an individual demand curve derived?
A: An individual demand curve is derived by plotting the quantities of a good that a consumer will buy at different prices, reflecting the relationship between the price of the good and the marginal utility.
Q: What are the limitations of Marginal Utility Theory?
A: Limitations include:
- Difficulty in measuring utility.
- Consumer behavior driven by habit or impulse.
- Increasing enjoyment from additional consumption in some cases.
- Variations in the quality and consistency of goods.
- Assumption that all other factors remain constant.
Q: What happens to Total Utility and Marginal Utility as more units are consumed?
A: Total Utility increases at a decreasing rate, and Marginal Utility decreases. Total Utility reaches a maximum when Marginal Utility is zero. Beyond this point, additional consumption decreases Total Utility.
Q: Explain the relationship between Marginal Utility and price in the context of demand.
A: A consumer will purchase a good up to the point where the marginal utility of the good equals its price. This relationship helps form the individual’s demand curve.
Q: What is the formula for consumer equilibrium according to the Equi-Marginal Principle?
A: The formula is:
MUa/Pa=MUb/Pb=MUc/Pc
Q: What happens when the price of a good falls, according to Marginal Utility Theory?
A: When the price of a good falls, more of the good is purchased to restore equilibrium, as the marginal utility per dollar spent must equalize across all goods consumed.
