Unit 5 – Marginal Utility

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Which is greater: your total utility from two slices of pizza or from four slices of pizza? Why?

Which is greater: your marginal utility of the second slice of pizza or your marginal utility of the fourth slice? Why?

Define Marginal Utility

Define Total Utility

Define Consumer Surplus. How is it calculated?

“Marginal” means difference between averages. T/F

What is the relationship between MU and TU?

When price is LOW/HIGH and demand is ELASTIC/INELASTIC consumers have the greatest surplus.

Write down the Optimal Purchasing rule. Explain what it means.

What is price discrimination? Describe 3 categories where companies can discriminate on price

Homer and Barney subsist solely on the consumption of two good: coffee and donuts. The price of coffee is $5 each and the price of donuts is $2 each. The marginal utility Homer received from the last coffee he consumed is 15 and his marginal utility from the last donut is 6. Barney's marginal utility from the last coffee is 2 and his marginal utility from the last donut is 8.

Which consumer is not maximizing his utility? Why?

Quantity Price willing to pay Actual Price Marginal Consumer Surplus

1st unit $10 $6 $

2nd unit 9 6 $

3rd unit 8 6 $

4th unit 7 6 $

5th unit 6 6

Total consumer surplus = $

Calculate total consumer surplus

If two people consume the same amount of a good, their total utility is also equal. T/F?

Complete the chartQuantity Total Utility (TU) Marginal Utility (MU)

1 20

2 35

3 10

4 8

5 58

6 60

7 0

8 -5

Why are demand curves for most goods downward sloping? Explain the relationship between MU and demand.

Suppose the price of Legos is $5 per set and the price of a squirt gun is $8 per gun. Compute the marginal-utility-to-price (MU/P) ratios for Legos and squirt guns and enter these values in the table

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How many sets of Legos and how many squirt guns will Jacob purchase if he has $26 to spend?

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Sketch a graph of her demand curve.

Suppose the price of the dolls in the previous question is $8, how much surplus does Chloe get?

If the dolls are free what is the consumer surplus?

The ideal market situation. Name it and does it still exist?

True or false. It is very important to differentiate products in a monopoly situation. Explain

In this market type, product differentiation is the key in increasing profits since firms can enter and exit the market relatively easily.

Few large firms controlling the market. What problems (2) could arise as a result?

Define the difference between Competitive and Non-Competitive markets.