Introduction

After you have worked through this section of the learning unit, you should be able to:

  • explain the concept total utility
  • explain with the aid of a utility schedule and a diagram why total utility increases at a decreasing rate

Study the example below for a better understanding of total utility:

Suppose that Marcel eats chocolate and records the amount of utility he receives from the consumption of each unit of chocolate. The first column in the table shows the number of chocolates consumed and the second column, the amount of total utility he obtained.

Total utility schedule

Number of chocolates consumed Total utility (utils)
0 0
1 8
2 14
3 19
4 23
5 26
6 28
7 29
8 29
9 25

Study the table and answer the following question:

What happens to Marcel’s total utility as he consumes the first seven units?




That is indeed the case.  As he consumes more chocolates, his total utility increases. This is indicated in column 2.

Not the case.  As he consumes more chocolates, his total utility increases. This is indicated in column 2.

Not the case.  As he consumes more chocolates, his total utility increases. This is indicated in column 2.

Before Marcel eats his first chocolate, he receives no utility. He cannot obtain any utility because he has not consumed any chocolate.

His first chocolate gives him eight utils. If he eats four units of chocolate, he receives 23 utils. His utility increases for the consumption of the first eight units of chocolates, until it starts to decline from the nine units onwards. Marcel obtains the highest level of utility after consuming seven units of chocolate.

Marcel's goal of consuming chocolate is to maximise his utility, that is, to consume the number of units that will generate the highest level of utility. For Marcel, utility is maximised at seven units.

Study the table and answer the following question:

If you look at the increase in Marcel’s total utility does it increase at a(n) ________ rate?




Not the case. If you look at the change in total utility, you will see that it increases at a decreasing rate, namely 6, 5, 4, 3.

That is indeed the case. If you look at the change in total utility, you will see that it increases at a decreasing rate, namely 6, 5, 4, 3.

Not the case. If you look at the change in total utility, you will see that it increases at a decreasing rate, namely 6, 5, 4, 3.

Let's plot Marcel's total utility as a graph:

His total utility is measured on the vertical axis, while the quantity of chocolates is measured on the horizontal axis.

Number of chocolates consumed Total utility (utils)
0 0
1 8
2 14
3 19
4 23
5 26
6 28
7 29
8 29
9 25

Total Utility

Total Utility

Total Utility

Total Utility

Total Utility

Total Utility

Total Utility

Total Utility

Total Utility

Total Utility

Total Utility

Total Utility

Total Utility

Total Utility

By combining the points we obtain the total utility curve.

An important thing to notice about the total utility curve is how it first increases at a decreasing rate, then reaches a maximum and then starts to decline.

Activity

Study the following diagram of the total utility for units of beer consumed by William and answer the questions:

Units of beer Total utility (utils)
0 0
1 12
2 22
3 30
4 37
5 42
6 45
7 46
8 46
9 42

Do you agree with the following statement?

To maximise his utility from drinking beer, William should drink nine units of beer – in other words, as much beer as he possibly can.



You should not agree since to maximise his utility, William should drink seven beers, which gives him a total utility of 46. If he drinks nine beers, his total utility is only 42.

You should indeed disagree.

To maximise his utility, William should drink eight beers, which gives him a total utility of 46. If he drinks nine beers, his total utility is only 42.

Is the following statement true or false?

William's total utility increases by the same amount of utils for every additional beer he drinks.



Think again. The statement is false.

It is indeed the case that if he drinks more beer, his total utility increases but it does not increase by the same amount.

Correct.  The statement is indeed false.

It is indeed the case that if he drinks more beer, his total utility increases but it does not increase by the same amount.

Choose the correct option in brackets:

As William consumes more units of beer, his total utility increases at a(n) (increasing, decreasing) rate.

Think again.

It increases at a decreasing rate. For unit two, the increase is ten, for unit three, the increase is eight, for unit four, the increase is seven and so on.

Correct choice.

It increases at a decreasing rate. For unit two, the increase is ten, for unit three, the increase is eight, for unit four, the increase is seven and so on.