Utility Basics and Budget Allocation

Flashcards covering utility concepts, marginal and total utility, diminishing marginal utility, MU per dollar, and the budget-allocation example from the notes.

What is Utility in consumer choice theory?

Utility is the numeric representation of the satisfaction a consumer derives from consuming a good or service, measured on an arbitrary scale, where only relative comparisons matter.

Define Marginal Utility (MU).

The additional satisfaction obtained from consuming one more unit of a good.

Define Total Utility (TU).

The sum of marginal utilities from all units consumed.

How are MU and marginal benefit related?

They are conceptually identical; the difference is typical usage (utility uses abstract units, benefit uses dollars or other goods).

If MU of the 1st pound is 120 and MU of the 2nd pound is 100, what is TU for 2 pounds?

220 utility points (120 + 100).

What happens to MU with each additional unit (diminishing marginal utility)?

MU diminishes (decreases) as more units are consumed.

What is MU per dollar (MU/Price)?

A metric used to compare the value of each incremental unit by dividing MU by its price; used to allocate a budget.

In the chocolate bar example, which unit had the highest MU per dollar for the first dollar?

Chocolate Bar #1 with MU per dollar of 100 MU/$ (assuming price is $1).

What was the final bundle and total MU in the budget allocation example?

Bundle: 3 chocolate bars and 1 pound of fruit; total MU = 460 (Chocolate: 100+80+60=240; Fruit: 120+100=220).

What is the general rule for budget allocation under a fixed budget?

Allocate each dollar to the good with the highest remaining MU per $. Stop purchasing a good when its next unit’s MU per $ falls below the MU per $ of any other available good.

What is the key takeaway about utility in resource allocation?

Utility provides a common metric to compare satisfaction across different goods; diminishing MU means each additional unit adds less satisfaction; MU per $ guides optimal spending under a fixed budget.

How does the first pound of fruit compare to the first chocolate bar in MU?

The first pound of fruit has MU = 120, which is 20 more than the first chocolate bar MU of 100.

Why is diminishing marginal utility important for budget decisions?

Because MU per $ changes as more units are consumed, optimal spending involves a mix of goods rather than concentrating on a single good.

What practical lesson do MU and TU concepts offer for consumers with a fixed budget?

To maximize satisfaction, purchase units with the highest MU per dollar until no remaining option offers a higher MU per dollar.