ECN(2).pdf - 1 Total and marginal utility Aa Aa EL Stelios...

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Unformatted text preview: 1. Total and marginal utility Aa Aa EL Stelios enjoys drinking milk, because his mother tells him it will make him grow up strong. The table that follows contains information on Stelios's utility from milk. Fill in the three missing utils. Milk Total Utility Marginal Utility (—Glasses per day) (Utils0 per day) (Utils per glass) 0— 1 2 55 -:/: 3 4 _ 5 6 7 Explanation: Open v On the following graph, use the red points (cross symbol) to plot Stelios's total utility (TU) curve if he consumes 0, 1, 2, 3, 4, 5, 6, or 7 glasses of milk per day. Line segments will automatically connect the points. Remember to plot from left to right. Answer TOTAL UTILITY lUtils per day] TOTAL UTILITY [Utils per day] 120 Total Utility 12” Ina " ‘l 103 96 96 84 8!. 72 72 60 60 48 48 36 36 24 2!. 12 12 5 6 7 8 5 6 7 8 MILK [Glasses per day] @ MILK [Glasses per day] Explanation: Close A If Stelios doesn't buy any glasses of milk, he receives zero utility, so the TU curve starts at the origin. Buying one glass of milk gives Stelios a total utility of 30 utils, so (1, 30) is a point on his TU curve. As you found previously, buying two glasses of milk gives Stelios a total utility of 55 utils, so (2, 55) is another point on his TU curve. Use the values in the table to plot the rest of the points on Stelios's TU curve. 0n the following graph, use the blue points (circle symbol) to plot Stelios's marginal utility (MU) curve from consuming his first seven glasses of milk. Line segments will automatically connect the points. Remember to plot from left to right. And to plot between integers. For example, if Stelios's marginal utility from increasing his consumption from one glass to two glasses of milk is X, then you would plot a point at (1.5, X). Answer MARGINAL UTILITY [Utils per glass] MARGINAL UTILITY [Utils per glass] 35 Marginal Utility 35 o \/ 3D 3D 25 25 20 20 15 15 1D 1D 5 5 0 U -5 -5 U 1 2 3 4 5 6 7 3 U 1 2 3 1: 5 6 '7 3 MlLK[Glasses per day] @ m MILK [Glasses per day] Explanation: Close A The table shows Stelios's total utility (TU) and marginal utility (MU) for his consumption of the first seven glasses of milk. When his consumption increases from zero to one glass of milk, his total utility increases from 0 utils to 30 utils, so his marginal utility is 30 utils - 0 utils = 30 utils. Therefore, (0.5, 30) is a point on his MU curve. Similarly, when Stelios increases his consumption from one to two glasses of milk, his total utility increases from 30 utils to 55 utils, so his marginal utility is 55 utils — 30 utils = 25 utils. Therefore, (1.5, 25) is another point on his MU curve. For Stelios, increasing his consumption of milk results in decreasing \l marginal utility. Explanation: Close A Stelios's total utility for the first six glasses of milk is increasing but at a decreasing rate. That is, Stelios's marginal utility from each additional glass of milk decreases with each additional glass he consumes. This is known as the law of diminishing marginal utility and is shown graphically by a downward-sloping marginal utility curve. Whenever Stelios's marginal utility is negative, his total utility is downward sloping \/ . Explanation: Close A Stelios's marginal utility at a given point is the same as the slope of his total utility curve. If consuming another glass of milk increases Stelios's total utility, then the marginal utility of the additional glass of milk is positive, and Stelios‘s total utility rises. If consuming another glass of milk decreases Stelios's total utility, then the marginal utility of the additional glass of milk is negative, and Stelios's total utility at the next point on the curve falls. Therefore, a positive marginal utility corresponds to increasing, or upward-sloping, total utility, and a negative marginal utility c0rresponds to decreasing, or downward-sloping, total utility. ...
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