Chapter 2 – The Consumer SHORT QUESTIONS Question 1: Define an economic good. An economic good is a product or service that commands a price. Question 3: Define marginal utility. Marginal utility (MU) is the addition to total utility (TU) brought about by the extra utility received caused by the consumption of one extra unit of a good. In other words, marginal utility refers to the extra satisfaction a consumer gets from consuming an extra unit of the good. Question 4: Define the law of diminishing marginal utility. The law of diminishing marginal utility states that as more units of a good are consumed, a point will be reached where marginal (extra) utility eventually begins to decline. LONG QUESTIONS Question 5: The table below illustrates the law of diminishing marginal utility. Complete the table and state the point after which diminishing marginal utility sets in and explain your reasoning. Number of units consumed 1 2 3 4 5 6 Total utility in units 20 45 65 80 90 95 Marginal utility in units 20 Number of units consumed 1 2 3 4 5 6 Total utility in units 20 45 65 80 90 95 Marginal utility in units 20 25 20 15 10 5 Question 8: In equilibrium a consumer buys 6 packets of biscuits at €1 each and 9 cakes at €2 each. The marginal utility of the 6 packets of biscuits is 8 utils. What is the marginal utility of cakes? Show your workings. = Marginal utility of cakes Marginal utility of biscuits Price of biscuits Price of cakes = MUc 8 €1 €2 Therefore, MUc (marginal utility of cakes) = 16 utils. © Edco 2012. Positive Economics – Solutions