Utility

Question 1

Utility

Answer 1

The enjoyment or satisfaction that people receive from leisure activities, and consuming goods and services.
A measure of Happiness.

Question 2

Individual Optimisation

Answer 2

• A rational individual seeks to maximise his/her utility.
• Individuals are constrained by their limited resource, most notably time and money.
• Individuals also have to contend with tradeoffs over time: For example investing in education today increases your income (and hence consumption) tomorrow.

Question 3

Marginal Utility

Answer 3

The change utility an individual experiences as a result of consuming one additional unit of a good or service.

Question 4

Law of Diminishing Marginal Utility

Answer 4

law of economics that states that holding, ceteris paribus, consumers experience diminishing marginal utility as consumption of a given good or service increases.

Question 5

Optimisation

Answer 5

The process of selecting the best or most effective outcome given the constraints on the situation (such as limited resources).
Utility is maximised when the Marginal Utility per dollar of each good consumed are equal.
(MU_X)/P_X = (MU_Y)/P_Y

Question 6

Marginal Rate of Substitution

Answer 6

The rate at which one good can be exchanged for another while maintaining a constant level of utility.
-At the optimum the MRS is equal to the ratio of prices.