Question

The new Spooky Tooth album just came out. You have listened to it six times today and experienced the units of utility per listen shown below:

LISTEN UTILITY

1 13

2 11

    3    8

    4    4

5    0

    6 - 6

1) Using excel or neatly creating by hand and scanning, draw a graph (as seen in the assigned learning materials for the week) showing marginal utility based on the material above. Explain what it means with specific reference to the numbers used in the graph.

2) Create a graph of total utility. Explain what it means based on the numbers calculated.

3) In order to maximize utility, how many times should the album be listened to? Provide an explanation.

4) In terms of utility, what could motivate you to switch from another activity and begin listening to the album?

5) How can marginal utility be used as a guiding principle when deciding how many different products your firm should market? Provide an original example.

Answer 1

1)

Marginal Utility is the amount of utility that an individual gets from each additional unit. From the first unit the individual gets 13 utils, from 2nd he gets 11 utils and so on. As can be seen the Marginal utility declines with each successive unit.

2)

Total Utility is obtained by adding the MU. So TU from consuming two units is the sum of MU of first and second. TU of three units is the sum of MU from first, MU from second and MU from third and so on. We can see that TU increases as consumption increase. However, after consuming 5 units TU starts declining.

3)

TU is maximized when MU = 0. Hence album should be listened to 5 times. Till 5 times, the MU is positive this implies that we are adding something to the TU. However, after 5 times TU starts declining. Hence 5 times is the optimal number.

4)

An individual will switch to listening to the album if he received more utility from listening than from other activity.

5)

A firm should produce products until the Marginal revenue is positive i.e. the sale of the product is adding to the Total Revenue. Once the MR = 0, this implies that TR has reached its maximum. Post the point increase in quantity will result in negative MR and thus TR will decline. Thus firm should sell till MR = 0. (In all this I have assumed that marginal cost is zero).