Question

John likes Coca-Cola. After consuming one Coke, John has a total utility of 10 utils. After two Cokes, he has a total utility of 25 utils. After three Cokes, he has a total utility of 50 utils.

a) Does John show diminishing marginal utility for Coke or does he show increasing marginal utility for Coke?

b) Suppose that John has $3 in his pocket. If Coke costs $1 each and John is willing to spend one of his dollars on purchasing a first can of Coke, would he spend his second dollar on a Coke too? What about the third dollar?

Answer 1

Answer:

A. Increasing Marginal Utility  B.  Yes, John will spend

Explanation:

Total Utility is the total satisfaction from all units of consumption

Marginal Utility is additional satisfaction from an additional consumption unit.

Coca Cola    TU         MU

1                   10         10

2                   25        15 (25-10)

3                   50         25 (25-15)

John's Marginal Utility is increasing each time in succeeding unit over its preceding unit.

b. John having $3, price of a coke = $1: will be willing to spend 1st 2nd & 3rd dollar on coke consumption because - its gainful for him (MU > P) each time.