Marginal utility approach, Managerial Economics

Marginal utility approach

The downward sloping nature of the demand curve can be explained by using the law of diminishing marginal utility.  For instance, consider a consumer who ahs to choose between two goods, X and Y, which have prices Px and Py respectively.  Assume that the individual is rational and so wishes to maximise total utility subject to the size of the income.

The consumer will be maximising total utility when his or her income has been allocated in such a way that utility to be derived from the consumption of one extra shillings worth of X is equal to the utility to be derived from the consumption of one extra shillings worth of Y.  In other words, when the marginal utility per shilling of X is equal to the marginal utility per shilling of Y.  Only when this is true will it not be possible to increase total utility by switching expenditure from one good to another.  This condition for consumer equilibrium can be written as follows:

                        Mux = Muy

                          Px     Py

Where MUx and MUy are the marginal utilities of X and Y respectively and Px and Py are the

prices (in shillings) of X and Y respectively.

Any number of commodities may then be added to the equation. The table below gives hypothetical marginal utility figures for a consumer who wishes to distribute expenditure of K£44 between three commodities X, Y and Z.

Marginal utilities derived from each Kg of:

Kg consumed

x (£8/kg)

Y (£4/kg)

Z (£2/kg)

1

2

3

4

5

6

7

 

72

48

40

36

32

20

12

60

44

32

24

20

8

4

64

56

40

28

16

12

8

In order to maximize utility, the consumer must distribute available income so that:

1886_marginal utility.png

From the table you can see that this yields, a selection where the consumer buys 2 kg of X, 4 kg of Y and 6 kg of Z.  Hence:

210_marginal utility1.png

If the consumer wishes to spend all the K£44, it is impossible to distribute it any other way which would yield greater total quality.  This theorem is called the concept of equi-marginal utilities.

Posted Date: 11/27/2012 5:15:27 AM | Location : United States







Related Discussions:- Marginal utility approach, Assignment Help, Ask Question on Marginal utility approach, Get Answer, Expert's Help, Marginal utility approach Discussions

Write discussion on Marginal utility approach
Your posts are moderated
Related Questions
How Hospital administrator use concept of managerial economics Hospital administrator can use tools and concepts of managerial economics to determine the optimal allocation of

I would like to get the answer to the question - Weston Industrial Manufacturing Products ("WIMP") has the capability to produce a variety of industrial products, including a numb

In the country of Sleep-well, the inhabitants' main activity is... sleeping. Despite the loss of productivity that this entails, the country has a profuse and renowned production o

Assume that Nicolas and Orson plan to sell soft drinks on a beach this summer. The beach is 400 meters long and sunbathers are spread evenly across its length. Nicolas and Orson se

Technically Efficient Method of Production Let's suppose that commodity X is produced by two methods by employing capital and labour: Factor inputs Met

Menu Costs   Why do firms not change their prices very  frequently? Obviously, the costs of changing prices at  frequent intervals and in small amounts must be more  than the b

Suppose you have estimated the following demand function for the product you sell: Q = 5 - 0.2P At what price will the demand for your product be unitary elastic? (Hint: B

Is a “perfectly competitive market” an efficient mechanism for the allocation of scarce resources? When it is, explain why. When it is not, document reasons for either inefficient

I can''t figure out the economic model of a company that I''m supposed to write a report about. The company is a tier 2 supplier, and over the years has bought out several subsidia

Direct Action Direct action in more than one from has been employed by the central banks either as an alternative to their discount rate policy or open market operations or tog