For Unit 4 Learning Journal, you will use the marginal utility formula to choose between two products.

Catherine is having dinner at the Yellow Restaurant. She wants desert after eating her entree. She is trying to decide between a cookie or a slice of pie. The cost of a cookie is $5 and the cost of a slice of pie is $8.

Refer to the Unit 4 Learning Journal Marginal Utility spreadsheet

Compute the marginal utility for cookie and slice of pie

Compute the marginal utility per dollar

What is the utility maximizing choice for a cookie and slice of pie?

Explain what the utility maximizing choice means.

Discuss how you could use marginal utility to make consumer choices

 

Answer:

The the marginal utility for cookie and slice of pie will be calculated by subtracting total utility of 'nth' quantity from 'n-1' quantity. The table below shows the marginal utlity for slice of pie and cookie and their respective utility per dollar.

Marginal utility of Cookie and MU per dollar

Marginal utility of slice of pie and MU per dollar

The bold numbers represent the allocation where MU of slice of pie/ Price of Pie = MU of cookie /Price of cookie.

• For the Marginal utlity per dollar of 5 quantity of cookie corresponds with 1 quantity of slice of pie. At this 5th quantity of cookie we have total utlity as 71 and at 1 quantity of pie we have total utlity of 16 . Hence total utility will be 71 + 16= 87
• For the Marginal utlity per dollar of 7 quantity of cookie corresponds with 6 quantity of slice of pie. At this 7h quantity of cookie we have total utlity as 84 and at 6th quantity of pie we have total utlity of 68. Hence total utility will be 84+ 68 = 152
• For the Marginal utlity per dollar of 7 quantity of cookie also corresponds with 3 quantity of slice of pie. At this 7h quantity of cookie we have total utlity as 84 and at 3rd quantity of pie we have total utlity of 42. Hence total utility will be 84+ 42 = 126

We see that total utility is maximised at 7th quantity of cookie and 6 quantity of pie where total utility is maximum. So optimal combination is (Cookie , Slice of pie) = (7, 6)

The utility maximizing choice means where the consumer is able to attain highest utility given his budget constraint because for every good he purchases he faces a price for them. The consumer will choose that combination of goods that will give him highest utility subject to his income. The utility maximisation rule states that consumers will decide to allocate their incomes in a manner where the last dollar spent on each good bought will give the same amount of additional marginal utility.

In economics, we have the law of diminishing marginal utility. The law states the marginal utility from an additional unit decreases as the quantity of goods consumed increases. The optimal choice of consumption is made by equating marginal utility of any good to its price and that price represents the consumer's willingness to pay which in turn depends on his marginal utility, So, the price and quantity demanded become inversely related which give rise to law of demand which forms the basis of any economy. Hence the consumer is able to make consumption decisions based on the price level through the utility theory.