People consume goods because they receive utility - Leaving Cert Economics - Question 2 (a) - 2018
Question 2 (a)
People consume goods because they receive utility. As they consume more units of the good their marginal utility will eventually decline.
(i) Explain each of the un... show full transcript
Worked Solution & Example Answer:People consume goods because they receive utility - Leaving Cert Economics - Question 2 (a) - 2018
Step 1
Explain each of the underlined terms.
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Answer
Utility
Utility is the satisfaction a consumer receives from consuming a good or service. It represents the pleasure or benefit derived from consumption.
Marginal Utility
Marginal utility is the additional satisfaction a consumer gains from consuming one extra unit of a good. It reflects how satisfaction changes with the consumption of each additional unit.
Step 2
Using the table below calculate the marginal utility at A, B and C.
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Answer
To calculate marginal utility, we find the difference in total utility when one additional unit is consumed.
For A (between 3 and 4 units):
extMarginalUtilityatA=extTotalUtilityat4units−extTotalUtilityat3units=110−70=40
For B (between 4 and 5 units):
extMarginalUtilityatB=extTotalUtilityat5units−extTotalUtilityat4units=130−110=20
For C (between 5 and 6 units):
extMarginalUtilityatC=extTotalUtilityat6units−extTotalUtilityat5units=140−130=10
Step 3
State at what point diminishing marginal utility sets in and explain your answer.
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Diminishing marginal utility sets in after the 4th unit is consumed or on the consumption of the 5th unit. It can be observed that the marginal utility starts to decline after the 4th unit, where it is 40, and falls to 20 at the 5th unit. This indicates that as more units are consumed, the satisfaction derived from each additional unit decreases.
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