Chapter 7: Utility

Question 1

Define utility

Answer 1

Utility is the level of satisfaction a person gets from consumption

Utility is abstract and subjective:
- The measure of utility differs from consumer to consumer
- Therefore we cannot compare one consumers utility to the next

Question 2

Define cardinal utility

Answer 2

It involves the idea that utility can be measured in some way
Assigning values to the amount of satisfaction that a person obtains from each successive unit of a consumer good or service that he/she consumes

Question 3

Define ordinal utility

Answer 3

Involves the ranking of different bundles of goods and services in order of preference

Question 4

Units assigned to level of satisfaction is known as

Answer 4

Utils

Question 5

Define marginal utility

Answer 5

Marginal utility is the additional utility that a consumer derives from consuming one extra utility of a particular good

MU = TU/Q

Question 6

What is the law of diminishing marginal utility

Answer 6

It is when identical units of a good are consumed one after the other. Marginal utility will decline until it reaches zero.

Thereafter, negative - called disutility

Question 7

What is weighted marginal utility

Answer 7

Utility with respect to price (gives an idea of the value for money they get from the unit)

MU/P

Question 8

What is total utility

Answer 8

Total utility is equal to the sum of all previous marginal utility is

• Total utility increases with consumption as long as marginal utility is positive
• Total utility reaches a maximum when marginal utility = 0
• Total utility decreases when marginal utility becomes negative

Question 9

What is known as Gossen’s 1st law

Answer 9

Marginal utility decreases with each extra unit consumed during a specific time

Question 10

Consumer equilibrium

Answer 10

The consumer is in equilibrium when he or she has allocated her income between different goods and services in such a way that the weighted marginal utilities of the different goods and services are equal