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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 1 apple is………………………………….

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)

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

Use the table:

TU from consuming 3 apples is………………….

TU from consuming 2 apples is…………………..

MU of 3rd apple is, therefore , …………………… minus ……………………………. =

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
40 0
10 1 10
2 9
Marginal utility (utils)
8 3 8
Total utility (utils)

25 4 7
6 5 6

15 4


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.

Total utility increases as consumption goes up.

Total utility increases at a decreasing rate.

MU decreases as consumption goes up.

Example 2

Please solve the following table and draw TU and MU below.

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 TU is the maximum, MU is =

Total utility always increase. True or false?

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

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.

Is it a paradox? No.

Water is plentiful, so the marginal utility of water is very low, although the TU
is very high. We consume water a lot, everyday, which drives the MU to a very
low. Even in some places the MU is zero. (But I can assure you if scientists
develop a colony in the moon, water will be very costly in that colony!)

On the other hand, diamonds are very scarce and available only in some
places. So though TU is low, its uses are very limited for which the MU is very

And the price is determined in terms of the MU, not in terms of the TU. That’s
why the price of diamonds is very high, and the paradox is not a paradox.