432review handout on utility

432review handout on utility - D r Westerhold Econ 432...

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Dr. Westerhold Econ 432 BASICS ON UTILITY—REVIEW FROM PRINCIPLES Utility : measure of benefit received from consuming a good Total utility : total satisfaction from accumulated consumption (TU) Marginal utility : additional benefit from increasing consumption by one unit. (MU or TU/ Q) Chart with TU and MU Given TU fill in MU or if given parts of TU and MU fill in the rest Pizza TU MU 0 0 1 50 50 2 80 30 3 100 20 4 100 0 5 95 -5 TU increases as your consume more TU increasing at a decreasing rate (less and less) MU is diminishing as you consume more called diminishing marginal utility: The more you consume of a given product, the less value each successive unit provides. Applies only to the same product (4 th coke less valued then 3 rd coke; not 4 th coke is less valued than 3 rd pizza) Consumers may consume as long as MU>=0 (as long as they receive positive benefits)
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Stop consuming when MU=0 (why engage in an activity that provides zero benefit) Irrational to consume when MU<0 (ex: overeating or drinking too much alcohol; makes you worse off)
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