AIOU 402 Economics Assignment Autumn 2018 (Question2)


Q2. (a) Differentiate between utility and satisfaction. Can we increase utility? If yes then explain how?


The conception of utility is Associate in Nursing elusive one. someone United Nations agency consumes an honest like peaches gains utility from intake the peaches. however we are able to live this utility identical manner we tend to can live a peach’s weight or calorie content. there's no scale we will use to work out the amount of utility a peach generates.

Total utility is that the mixture add of satisfaction or profit that a personal gains from intense a given quantity of products or services in Associate in Nursing economy."

Satiation suggests that a sense of fullness, whether or not that be with Associate in Nursing feeling or food. It is conjointly the concept of relieving as within the sentence "It gorged her hunger."

Satisfaction is a lot of of being content with one thing. As if one thing were adequate to meet your wish. Normally, satisfaction is employed with Associate in Nursing feeling and satiation with hunger, however the 2 are extremely interchangeable.

 Can we tend to increase utility? If affirmative then make a case for how?

Choices that maximize utility—that is, selections that follow the marginal call rule—generally manufacture downhill demand curves. This section shows however Associate in Nursing individual’s utility-maximizing selections will cause a requirement curve.

Deriving Associate in Nursing Individual’s Demand Curve

Suppose, for simplicity, that Mary Andrews consumes solely apples, denoted by the letter A, and oranges, denoted by the letter O. Apples price $2 per pound and oranges price $1 per pound, and her budget permits her to pay $20 per month on the 2 product. we tend to assume that Ms. Andrews can regulate her consumption so the utility-maximizing condition holds for the 2 goods: The magnitude relation of utility to cost is that the same for apples and oranges. That is,

Equation 7.4

MUA $2 = MUO $1

Here MUA and MUO ar the marginal utilities of apples and oranges, severally. Her disbursement equals her budget of $20 per month; suppose she buys five pounds of apples and ten of oranges.

Now suppose that a strangely giant harvest of apples lowers their worth to $1 per pound. The cheaper price of apples will increase the utility of every $1 Ms. Andrews spends on apples, so at her current level of consumption of apples and oranges

Equation 7.5

MUA $1 > MUO $1

Ms. Andrews can respond by buying a lot of apples. As she will therefore, the utility she receives from apples can decline. If she regards apples and oranges as substitutes, she's going to conjointly purchase fewer oranges. which will cause the utility of oranges to rise. she's going to still regulate her disbursement till the utility per $1 spent is equal for each goods:

Equation 7.6

MUA $1 = MUO $1

Suppose that at this new answer, she purchases twelve pounds of apples and eight pounds of oranges. She remains disbursement all of her budget of $20 on the 2 product [(12 x $1)+(8 x $1)=$20].

 (b) Explain the weighted marginal utility and its role in determining the consumer’s equilibrium

Principle of equi-marginal utility occupies a crucial place within the utility analysis. it's through this principle that consumer’s equilibrium is explained. A client includes a given financial gain that he should pay on varied product he desires.

Now, the question is however he would allot his cash financial gain among varied product that's to mention, what would be his equilibrium position in respect of the purchases of the assorted product. it's going to be mentioned here that client is assumed to be ‘rational,’ that is, he in cold blood and punctiliously and substitutes product for each other therefore on maximize his utility or satisfaction.

Suppose there are solely 2 product X and Y on that a client should pay a given financial gain. The consumer’s behavior are going to be ruled by 2 factors: 1st, the marginal utilities of the products and second, the costs of 2 product. Suppose the costs of the products ar given for the patron.

The law of equi-marginal utility states that the patron can distribute his cash financial gain between sensibles the products} in such how that the utility derived from the last rupee pay on every good is equal. In alternative words, client is in equilibrium position once utility of cash expenditure on every product is that the same.

Now, the utility of cash expenditure on an honest is capable the utility of products divided by the worth of the products.

In symbols:


Where MUe is utility of cash expenditure and MUz is that the utility of the products X and Pz is that the worth of X. The law of equi-marginal utility will, therefore, be declared thus: the patron can pay his cash financial gain on completely different product in such how that utility of every sensible is proportional to its worth. That is, client is in equilibrium in respect of the purchases of 2 product X and Y once

MUz/ PZ = MUz / PZ

Now, if MUz / PZ and MUy/ PZ aren't equal and MUz / PZ -is larger than MUz / PZ then the patron can substitute product X for product Y. As a results of this substitution the utility of products Y can rise. {the client the buyer the patron} can continue subbing product X for product Y until MUy/ PZ becomes capable MUy / PZ once MUZ/ PZ becomes capable the Muy/ PZy consumer are going to be in equilibrium.

But the equality of MUZ / PZ with MUy/PZ will be achieved not solely at one level however at completely different levels O expenditure. The question is however way a client goes on buying the products he desires. this is often determined by the scale of his cash expenditure. With a given expenditure a rupee includes a bound utility for him: this utility is that the utility of cash by him.

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