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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.
Answer
Utility: This refers to the satisfaction a consumer receives from consuming a good or service. It quantifies the benefit that consumers derive from their choices, and is a key concept in understanding consumer behavior.
Marginal Utility: This is the additional satisfaction or benefit that a consumer receives from consuming one more unit of a good. It measures how much more utility a consumer receives from an incremental increase in consumption.
Step 2
Using the table below calculate the marginal utility at A, B and C.
Answer
To find the marginal utility at points A, B, and C, we analyze the changes in total utility as more units are consumed:
-
Marginal Utility at A:
A = Total Utility at 4 units - Total Utility at 3 units
A = 110 - 70 = 40 -
Marginal Utility at B:
B = Total Utility at 5 units - Total Utility at 4 units
B = 130 - 110 = 20 -
Marginal Utility at C:
C = Total Utility at 6 units - Total Utility at 5 units
C = 140 - 130 = 10
Thus, the values are: A = 40, B = 20, C = 10.
Step 3
State at what point diminishing marginal utility sets in and explain your answer.
Answer
Diminishing marginal utility sets in after the consumption of the 4th unit of the good.
This can be observed as the marginal utility starts to decrease after this point. Specifically, the marginal utility at the 4th unit is 40, and it drops to 20 at the 5th unit, and further to 10 at the 6th unit. This illustrates the principle that as more units of a good are consumed, each additional unit provides less satisfaction than the previous ones.