1.

Define the following terms:

● Total Utility – Total utility is the total satisfaction received from consuming a given total
quantity of a good or service. Example I get a total satisfaction form easting a box of donut.

● Marginal Utility- Marginal utility is the added satisfaction that a consumer gets from
having one more unit of a good or service. The concept of marginal utility is used by
economists to determine how much of an item consumer are willing to purchase.

● Law of Diminishing Marginal Utility

The law of diminishing marginal utility means that as we consume more of an item, the
amount of satisfaction produced by each additional unit of that good declines. We can use
donut for an example. The more you consume donuts the less satisfaction you’ll get each time
versus from the consumption of the first donut.

2. Explain the relationship between total utility and marginal utility.

The relationship between total utility and marginal utility indicates that when marginal utility
decreases, total utility increases at a decreasing rate, and when total utility is at a maximum
point, marginal utility is zero and total utility starts to decline if marginal utility is negative.
This goes to say that as long as marginal utility is positive, total utility will increase and once
marginal utility is negative, then total utility will decrease.

 MU is the rate of change of TU

 When MU becomes negative. TU declines

3. The table below is incomplete showing utility maximization for breads and buns. The
price of bread is $1 per loaf and the price of buns is $1 per bag.

Units of Total Utility Marginal Utility Marginal Utility per

Goods Dollar
MU/P
Bread Buns Bread Buns Bread Buns
0 0 0 0 0 0 0
1 6 5 6 5 6 5
2 11 9 5 4 5 4
3 15 12 4 3 4 3
4 18 14 3 2 3 2
5 20 15 2 1 2 1