Starting with Basics by Using Single Input Production Functions

76 Part II: Considering Which Side You’re On in the Decision-Making Process

Your total utility is now 50 utils (20 + 30). The third slice of pizza also tastes good, but not quite as good as the second — your additional satisfaction is only 25 utils. At this point, diminishing marginal utility has set in, because 25 is less than 30. However, note that your total utility is still increasing. It is now 75 utils (20 + 30 + 25).

Diminishing marginal utility continues and by the time you reach the eighth slice of pizza, you’re stuffed. The pizza still tastes good, but your stomach is starting to hurt from all the pizza. At this point, marginal utility becomes negative, and your total utility starts to decrease.

Table 5-1 illustrates this situation.

Table 5-1 Total and Marginal Utility

Number of Pizza Slices Total Utility Marginal Utility

0 0 Marginal utility not yet established

1 2 3 4 5 6 7 8 20 50 75 95 110 120 125 120 20 30 25 20 15 10 5 –5

Note how the total utility for any given number of pizza slices equals the sum of the marginal utilities up to that slice. Also, note how the marginal utility is always the difference in total utility from one slice to the next.

Doing the Best You Can Given Consumer Constraints

Although you like both apples and oranges, you can’t eat as many as you want because you’re constrained by your income and the price of apples and oranges. The constraint imposed by income and the price of goods is called the budget constraint. The budget constraint is an equation that indicates that if you multiply the quantity of each good purchased by its price and then add