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# Consumer Choice: Maximizing Utility and Behavioural Economics

## Utility: A measure of the satisfaction, happiness or benefit that results from

the consumption of a good.

## Util: An artificial construct to measure utility.

Total Utility (TU): Total satisfaction one receives from consuming a particular
quantity of a good.

## Total utility from consuming 5 apples is…………………………………

Marginal Utility (MU): Marginal utility is the additional utility gained from
consuming an additional unit of a good.

## MU = ∆ TU / ∆ Q = change in total utility over change in quantity

Usually: MU of the nth unit = TU receives from n unit – TU receives from (n-1)
unit

For example: MU of the 3rd unit = TU received from 3 Units – TU receives from
2 units

## Units of apple (good X) Total utility (TU) Marginal utility (MU)

0 0 -
1 10 10-0 = 10
2 19 19-10 = 9
3 27 27-19= 8
4 7
5 34
Law of Diminishing Marginal Utility: for a given time period, the marginal
utility gained by consuming equal successive units of a good will decline as the
amount consumed increases.

Consumption of X↑ MU↓

See the above table. MU goes down as consumption of apples goes up.

## Graphical presentation of TU, MU and the law of diminishing MU:

45 Units
12 of good
MU X
40 0
10 1 10
35
2 9
30
Marginal utility (utils)
8 3 8
Total utility (utils)

25 4 7
6 5 6
20

15 4

10
2
5

0 0
0 1 2 3 4 5 6 0 1 2 3 4 5 6
Quantity of good X Quantity of good X

Derivation of TU: Plot the data from column 1 and 2 Derivation of MU: Plot the data from column 1 and
in the table and then connect the points column 2 and connect the points.

Example 2

## Units of apple (good X) Total utility (TU) Marginal utility (MU)

0 0 -
1 10 10
2 8
3 24
4 4
5 30
6 0
7 28

TU is maximum when Q=

## When MU=0, TU is the maximum. True or false?

Example 3:

Look at the following graph and in three/ four lines discuss the relation
between TU and MU.

## The diamond–water paradox: Although water is on the whole more useful, in

terms of survival, than diamonds, diamonds command a higher price in the
market.

TU of water is unlimited. But the price of water is very low compared with the
price of diamonds. This is the paradox of value.