Microeconomics the Concept of Marginal Utility Reflects

Microeconomics

The concept of marginal utility reflects the additional utility that a buyer receives for an additional unit of a good. In this example, Amy is spending an extra dollar if she buys either a bracelet or a soda. If she has an extra dollar, however, she is likely to purchase a soda. This is because the marginal utility of a soda at this point is 40, whereas an extra bracelet has a marginal utility of 30. The rational consumer is going to put their extra financial unit to whatever purchase will maximize utility.

If these utility figures hold, Amy is not maximizing utility. To maximize utility, Amy would only purchase soda since soda has a higher marginal utility than a bracelet.

Amy should consume only sodas if the marginal utility of these goods never changes.

Diminishing marginal utility implies that over time the marginal utility of something will diminish. Thus, if Amy buys a soda, she will quench her thirst. The marginal utility of the second soda will therefore be lower than the marginal utility of the first soda. By the fourth or fifth soda, the marginal utility is likely to be very low for soda. However, the marginal utility of bracelets is likely going to decline at a much slower rate, because she can fit many bracelets on her arm and there are fewer costs associated with additional bracelets (like getting full).

5. The total utility received will increase over time, until such point as the marginal utilty of an additional good is negative. For example, after five sodas, maybe Amy is so sick of soda that to consume another one would actually be negative. Only at that point would the total utility begin to decline, but in general it continues to rise, just more slowly.

6. The total dollars spent will continue to increase as Amy buys more stuff. At some point, the dollar will have more marginal utility than either a bracelet or a soda, and at that point Amy will stop spending. But total dollars spent will increase until there is no more marginal utility left to purchase.

2-6. 1. $450,000

2.

Qty of boats

Total Cost

Variable Costs

Average Variable Costs

Average Total Costs

Average Fixed Cost

(a.)

(b.)

(c.)

(d.)

0

$450,000

1

490,000

$40,000

$40,000

490000

$450,000

2

510,000

$60,000

$30,000

255000

$225,000

3

520,000

$70,000

$23,333

173333.3

$150,000

4

540,000

$90,000

$22,500

135000

$112,500

5

570,000

$120,000

$24,000

114000

$90,000

6

610,000

$160,000

$26,667

101666.7

$75,000

7

670,000

$220,000

$31,429

95714.29

$64,286

8

750,000

$300,000

$37,500

93750

$56,250

9

870,000

$420,000

$46,667

96666.67

$50,000

3. The minimum cost output is roughly where the average cost and the marginal cost are around the same, and this point is 4 boats.

4.

Qty of boats

TC

Marginal Costs

0

$450,000

1

490,000

$40,000

2

510,000

$20,000

3

520,000

$10,000

4

540,000

$20,000

5

570,000

$30,000

6

610,000

$40,000

7

670,000

$60,000

8

750,000

$80,000

9

870,000

$120,000

3.7 a.

Gallons

FC

VC

TC

MC

AVC

ATC

of Milk

0

$500

$2,100

$2,600

$2,100

$2.10

$2.60

2000

$2,200

$2,700

$100

$1.10

$1.35

$2,900

$3,400

$700

$0.97

$1.13

$3,680

$4,180

$780

$0.92

$1.05

$5,180

$5,680

$1,500

$1.04

$1.14

b. The breakeven price for a given volume is the average total cost.

c. The shut down price is the average variable cost.

d. In the short run, Joe will turn a profit at $1.50 per gallon if he sells 2000 or more gallons. If he sells 1000 gallons, Joe will not turn a profit.

e. In the short run, Joe should produce.