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IAI Actuarial Core Principles · Business Economics · Consumer demand and behaviour

A consumer buys only chai and samosas. Her total utility from samosas rises from 40 utils at 3 samosas to 52 utils at 4 samosas and to 61 utils at 5 samosas. Which statement about her marginal utility is correct?

The fifth samosa adds 9 utils, below the 12 utils added by the fourth. Marginal utility is the extra total utility from one more unit, so it is falling while total utility still rises. This pattern illustrates diminishing marginal utility.

  1. AMarginal utility of the fifth samosa is 9 utils and is lower than that of the fourth, consistent with diminishing marginal utilityCorrect
  2. BMarginal utility of the fifth samosa is 61 utils because it equals total utility
  3. CMarginal utility of the fourth samosa is 13 utils
  4. DMarginal utility is increasing because total utility keeps rising
  5. Marginal utility of the fifth samosa is 12 utils and equal to that of the fourth

Explanation

Marginal utility is the change in total utility from one extra unit. The fourth samosa adds 52-40=12 utils and the fifth adds 61-52=9 utils. Marginal utility is falling even though total utility rises, which is diminishing marginal utility. Saying it is increasing confuses total with marginal utility.

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