Utility

The utility of a consumer is a measure of the satisfaction the consumer derives from
consumption of goods and services.

Consumption Bundle

An individual’s consumption bundle is the collection of all the goods and services consumed by
that individual.

Total Utility

An individual’s utility function gives the total utility generated by his or her consumption
bundle.

Marginal Utility

The marginal utility of a good or service is the change in total utility generated by consuming
one additional unit of that good or service.

Law of diminishing marginal utility

The basic idea behind the principle of diminishing marginal utility is that the additional
satisfaction a consumer gets from one more unit of a good or service declines as the amount of
that good or service consumed rises. Or, to put it slightly differently, the more of a good or
service you consume, the closer you are to being satiated—reaching a point at which an
additional unit of the good adds nothing to your satisfaction.

Budget Constraint

A budget constraint requires that the cost of a consumer’s consumption bundle be no more than
the consumer’s income.

Consumption possibilities

A consumer’s consumption possibilities is the set of all consumption bundles that can be
consumed given the consumer’s income and prevailing prices.

Optimal Consumption Bundle

A consumer’s optimal consumption bundle is the consumption bundle that maximizes the
consumer’s total utility given his or her budget constraint.

Indifference Curve

An indifference curve is a line that shows all the consumption bundles that yield the same
amount of total utility for an individual.
 Problem 1

The price of Camera is $ 4, the price of MP3 is $ 4 and the Income of a person is $ 20. The information
regarding his utilities from the consumption of these goods is as follows:
Quantity of Total Utility from Quantity of Total Utility from
Camera Camera MP3 MP3
0 0 0 0
1 32 1 28
2 60 2 52
3 84 3 72
4 104 4 96
5 120 5 108

Requirements:
I. Construct the possible consumption bundle.
II. Determine the optimal consumption bundle.

Problem 2
The price of Cell phone is $ 50, the price of sunglasses is $ 50 and the Income of a person is $ 200. The
information regarding his utilities from the consumption of these goods is as follows:
Quantity of Total Utility from Cell Quantity of Total Utility from
Cell Phone Phone Sunglasses Sunglasses
0 0 0 0
1 400 1 325
2 700 2 600
3 900 3 825
4 1000 4 900

Requirements:
I. Construct the possible consumption bundle.
II. Determine the optimal consumption bundle.

Problem 3

Price of Potato is 5 Taka. A person has 15 taka each day to spend on potato.

a) Fill out the blanks in the following table

potato consumed per Total Utility of Marginal utility of Marginal utility of potato per taka
day potato potato expended ( price= 5 Taka)
0 0 0 0
1 40 40 8
2 ? 10 ?
3 55 ? ?
 Problem 4

Price of Burger is 15 Taka. A person has 75 taka each day to spend on burger.

a) Fill out the blanks in the following table

Burger consumed per Total Utility of Marginal utility of Marginal utility of Burger per taka
day Burger Burger expended ( price= 15 Taka)
0 0 0 ?
1 60 ? 4
2 80 20 ?
3 ? 15 1
4 105 ? ?
5 ? 15 ?

Problem 5

Price of Chips is 10 Taka, price of Juice is 30 Taka. A person has 120 taka each day to spend on chips and
juice.

a) Fill out the blanks in the following table

Chips Total Marginal Marginal Juice Total Marginal Marginal

Consumed Utility of Utility of Utility of consumed Utility Utility of Utility of
per day Chips Chips Chips per per day of Juice Juice Juice per
Taka Taka
expended expended
( Price= ( Price=
10 Taka) 30 Taka)

0 0 ? 0 0 0 0 0
1 40 40 ? 1 70 ? 2.33
2 ? 30 3 2 120 ? ?
3 90 ? ? 3 ? 30 1
4 ? 10 1 4 160 10 0.33