Utility (Definitions)

Question 1

Marginal Utility

Answer 1

The change in total utility resulting from the consumption of one extra unit of a given commodity - Measures the satisfaction derived from consuming the additional unit of a good/service.

MU= TU2 - TU1

Question 2

Total Utility

Answer 2

The aggregate satisfaction gained from consuming successive quantities of a good.

TU= MU1+ MU2+ MU3+ MU4 + so on

Question 3

Utility

Answer 3

Reflects the usefulnes, benefit or satisfaction derrived from consumption.

Question 4

Law of diminishing marginal utility

Answer 4

States that marginal utility falls as more of a good is consumed.
Or
States that as successive equal additions to the quantity of a good or service is consumed it provides smaller and smaller increases in total utility.

Question 5

Optimal/ optimum purchase rule

Answer 5

The rational consumer will continue to purchase more of a good or service up to and inculuding the point where price equals marginal utility. (Consumer surplus is maximised)

Assume consumers act rationally - Choose between goods and services so as to maximise total satisfaction.

MU≥P

Question 6

Equi-Marginal Rule /
Law of Equal Marginal Utility

Answer 6

When purchasing a range of goods and services a consumer would want to maximise their total utility with their limtied budget/income and achive consumer equilibrium.

Question 7

2 conditions of:
Equi-Marginal Rule /
Law of Equal Marginal Utility

Answer 7

1: Consumers should make choices where the ratio of marginal utility per dollar spent for all goods purchased are (must) equal
MU Good A/Price good A = MU Good B/Price Good B = MU Good C/Price Good C.

2: They should maximise their total utility given their budget (ideally, spend ALL of their budget)