7.1 Utility

Question 1

What is the definition of total utility?

Answer 1

It is the overall satisfaction that a consumer derives from the consumption of particular goods and services

Question 2

What is the definition of marginal utility?

Answer 2

It is the additional satisfaction that a consumer gets from having one more unit of a good or service

Question 3

What is diminishing marginal utility?

Answer 3

as an extra unit of a good is consumed, the marginal utility falls

Question 4

What is the equi-marginal principle

Answer 4

This is basically how consumers allocate their incomes differently across goods and services in order to maximise their utility.

Question 5

What are the assumptions of the equi-marginal principle?

Answer 5

Consumer income is fixed
prices are fixed
tastes and preferences are fixed
consumers are able to perform utility calculations

Question 6

What are the limitations of marginal utility theory and its assumptions of rational behaviour?

Answer 6

Marginal utility theory assumes that consumers are rational and make decisions based on their preferences and the marginal utility they derive from each unit of a good. However, this assumption is often unrealistic as consumers may not always have complete information or may be influenced by factors such as emotions or social norms.

The influence of advertising - a successful campaign could cause them to act irrationally and buy the product
The influence of the decisions of others - following actions of the crowd which can be irrational
Habitual behaviour - consumers may prefer sticking to what they know which stops them from being rational
Consumers weakness at computation - not good at processing info like machines are

Question 7

What is the law of diminishing returns?

Answer 7

It states that in the short run when variable FOP (labour) are added to a stock of fixed FOP (capital) total/marginal product will initially rise and then fall

Question 8

Explain the marginal utility curve

Answer 8

Part 1 - marginal product is rising
This is as there is specialisation taking place. 2nd worker learns from the first worker and so on and so on. They specialise too. One person can be on sauce one person on ovens etc. Also there is underutilisation of fixed FOP’s. Excess ovens etc. This means labour productivity is rising and marginal product is therefore increasng.

Part 2 - Fixed FOP’s become a constraint on construction which means there aren’t enough fixed FOP’s to take more than a specific amount of workers. Not enough ovens or workspace and start to effect each others output and labour productivity falls as a result