Answer to Question #219081 in Microeconomics for Rahul

Question

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The following table shows the total utility gained from the consumption ofFanta Lemon in a week.left is quantity and right is total utility1-202-353-454-535-586-587-48
1. Calculate the marginal utility. What do you observe?2. Sketch the total utility and marginal utility curves.3. If the price of Fanta Lemon increases from Rs.8 to Rs.10, how will itaffect its consumption?Explain your answer using the data above.

Answer 1

1) marginal utility is decreasing

2)

3)

When the price of Fanta Lemon was Rs. 8, the quantity demanded was 4 units. 

When the price of Fanta Lemon increased to Rs 10, the quantity demanded fell to 3 units.

This is because the marginal utility is the additional utility gained from the consumption of one more unit of output.

And the marginal cost for consumers is the price of Fanta Lemon.

 

Consumers would only continue to consume an additional unit of output when marginal utility is greater than the marginal cost. Consumers would reduce the quantity of amount consumed when marginal cost is higher than marginal uitility.

Thus when the price increases from Rs. 8 to Rs. 10, consuming 4 units would cause the marginal cost to be greater than the marginal utility. Thus consumption drops to 3 units. At 3 units, marginal utility equals price i.e. marginal cost, thus being optimal point of consumption when price is Rs.10