utility theory

• Firms aim to maximize profits
• What do economic agents aim to maximize according to traditional neoclassical thought?

  Their benefit
• Governments seek to maximize the social welfare of their citizens.
• The marginal utility is the extra utility gained when one more cup of Coca-Cola is drunk
• What is the marginal utility in economics?

  Extra utility from one more unit
• The marginal utility is also referred to as the marginal private benefit.
• How is average utility calculated?

  Total utility divided by quantity
• The y-axis of a utility curve is labeled in utils
• Both the marginal utility curve and the average utility curve are downward sloping due to the law of diminishing utility.
• What does the law of diminishing utility state?

  Marginal utility decreases with quantity
• Total utility is maximized when marginal utility is equal to zero
• Consuming beyond the point where marginal utility is zero will decrease total utility.
• What happens to marginal utility when it becomes negative?

  Total utility decreases
• When economists simplify and say that price is equal to utility, they can amend the y-axis of utility curves.
• What condition must be met for a consumer to maximize utility when there is a price involved?

  Marginal utility equals price
• When the price of a good increases, the quantity demanded decreases
• A consumer will continue to consume units as long as the utility derived is more than the price paid.
• What is the relationship between the marginal utility curve and the demand curve?

  They are the same