Question

Take Jeremy’s total utility information in Exercise 6.1, and use the marginal utility approach to confirm the choice of phone minutes and round trips that maximize Jeremy’s utility.

Short answer

1 round trip and 160 phone minutes.

Step-by-step solution

Definition

Marginal utility can be defined as the additional utility that is derived from the consumption of an extra unit of good or service.

Step 2:Explanation

First of all, we will calculate marginal utility using the total utility valuesgiven in the table below.

Step 3:Calculation

Marginal utilties cannot be directly compared because of difference in utilities. A common denominator such as price is required to make a comprison. Columns 4 and 8 in the table below result from dividing MU by the price.

Now, starting at the bottom of the table, and make comparison between the MU/P for both round trips and phone minutes, it can be easily seen that phone minutes are providing greater marginal utility for every dollar spent.

Step 4:Conclusion

As we go upwards on the table, the gap between the marginal utility of last dollar spent between round trips and phone minutes keeps declining. Utility is said to be maximized when the marginal utility of last dollar spent on the two goods is same. Since, this is not the case here, we will choose the combination with the least gap. SUch combination is 1 round trip and 160 phone minutes.