Question

As Keith Collins buys more and more of any good or service, his (LO3) a) total utility and marginal utility both decline b) total utility and marginal utility both rise c) total utility rises and marginal utility declines d) total utility declines and marginal utility rises

Short answer

As Keith Collins buys more and more of any good or service, his total utility rises and marginal utility declines, which corresponds to option (c). This is due to the Law of Diminishing Marginal Utility, which states that as consumption increases, the additional satisfaction gained from each extra unit decreases.

Step-by-step solution

Understanding Total Utility and Marginal Utility

Total Utility refers to the overall satisfaction or usefulness derived from consuming a particular good or service. On the other hand, Marginal Utility is the additional satisfaction or usefulness obtained from consuming one more unit of the good or service.

Analyzing the Relationship between Total Utility and Marginal Utility

As consumption increases, the total utility generally increases because people are getting more satisfaction or usefulness out of the good or service. However, marginal utility may increase, decrease, or remain constant depending on the specific good or service.

Analyzing the Law of Diminishing Marginal Utility

The Law of Diminishing Marginal Utility states that, as you consume more and more of a good or service, the additional satisfaction or usefulness obtained from each extra unit decreases. In other words, the marginal utility declines for each additional unit consumed.

Determining the Relationship between Total Utility and Marginal Utility for Keith Collins

As Keith Collins buys more and more of any good or service, his total utility will rise because he is receiving more satisfaction or usefulness from the good or service. However, due to the Law of Diminishing Marginal Utility, the additional satisfaction that Keith derives from each extra unit will decline, meaning that his marginal utility will decrease.

Answering the Exercise

Based on the analysis, as Keith Collins buys more and more of any good or service: - Total Utility rises - Marginal Utility declines Therefore, the correct answer is (c) total utility rises and marginal utility declines.

Key concepts

Total Utility

Imagine you’re at your favorite ice cream shop, tasting one scoop after another. The joy you feel from each delicious bite is what economists call 'total utility'. This term refers to the total satisfaction you receive from consuming a certain amount of a product or service. As you indulge in your first scoop, you're filled with happiness – that's the total utility starting to add up. With each additional scoop, the total utility increases because you're enjoying more ice cream overall.

However, as you keep eating, you might notice that every additional scoop is not quite as satisfying as the last; that's an important clue that we're about to encounter another concept called 'marginal utility'. But to keep the focus on total utility – it is the accumulation of joy from all scoops you've had, despite the fact that later scoops may not be as thrilling as the initial ones.

Marginal Utility

Now, let's talk about that slight decrease in joy with each extra scoop. That's 'marginal utility' - the happiness you gain from consuming 'one more' of something. When you first tasted that ice cream, the additional satisfaction from the initial scoop was sky-high. However, with each successive scoop, even though you still enjoy it, the extra joy ('marginal utility') you get decreases.

This phenomenon is known as the 'Law of Diminishing Marginal Utility'. It's a bit like laughter with jokes - the first joke gets a big laugh ('high marginal utility'), but tell the same joke again, and the laughs get smaller ('diminishing marginal utility'). So, even if the total utility (the sum total of laughs) increases with more jokes, the marginal utility (the joy from each new joke) tends to drop after the first few.

Microeconomic Principles

Both total utility and marginal utility are part of broader microeconomic principles that analysts use to understand consumer behavior. Microeconomics focuses on the choices made by individuals and businesses and the factors that influence those choices. It operates on the fundamental premise that resources are limited, and people must decide how best to use them.

Within this realm, concepts like 'demand', 'supply', and 'elasticity' interact in complex ways to form market outcomes. The Law of Diminishing Marginal Utility is one such microeconomic principle, indicating that there's a limit to consumption, guided by the satisfaction derived from each additional unit. Understanding these principles helps economists and businesses predict consumer choices and market trends.

Consumer Behavior

Consumer behavior is the study of how people make decisions about what they buy, want, need, or act in regards to a product, service, or company. It's complex and is influenced by various factors including personal, psychological, and social factors.

One of the key insights of consumer behavior is that purchasing decisions are not just about the physical product but also about the satisfaction and utility it provides. Consumers, knowingly or unknowingly, consider the total utility of their purchases and how the marginal utility will decline with consumption. Grasping this concept helps businesses and marketers design products, set prices, and craft marketing strategies that align with consumers' pursuit of utility maximization.