Question 5 20 Points a Define Marginal Utility MU 5 pts b De

Question #5 (20 Points) a) Define Marginal Utility (MU) (5 pts) b) Define Marginal Rate of Commodity Substitution (MRCS) (5 pts) c) For a utility function U(x,y), derive that MRCSxy MUxdy (10 pts) MUy dx (

Solution

a)MU is the additional benefit / satisfaction which an individual gains by purchasing an additional unit of a product. The theory infers that the utility / benefit to a customer from an additional unit of a commodity is inversely related to the quantity of units of that commodity she already owns

b) The MRCS is the amount of a product which a customer is ready to forego for another product, so long as the new product is equivalently satisfying. It is utilized in indifference concept to study ‘consumer behaviour’. The MRCS is measured between 2 products positioned on an indifference curve, showing a frontier of equivalent utility for every combination of ‘good X’ & ‘good Y’

c)We firstly get the total derivative for utility:

du equals ( U/x)dx+(U/y)dy

This can be written as-

U/x divided by (U/y)=-dy/dx

As U/x is MUx & U/y is MUy

Thus,

MRS equals -dy/dx

=U/x divided by (U/y)

=MUx/MUy