(a) Explain the concept of diminishing marginal utility. (b) How is utility maximized?

Explanation

(a)The concept of diminishing marginal utility holds that as additional unit of a commodity is consumed, it adds less and less to total utility and later adds nothing to total utility. Further consumption leads to negative values, then total utility diminishes as reflected in the total curve dropping downwards.

(b) A consumer's utility is maximized when the marginal utility per amount spent on a product is equal to the marginal utility per amount spent on any other product. It can be written mathematically asMux=Muy=Mz

Px Py Pz

Where MUx, Muy, Muz represent the marginal utilities of products x, y, .z

while Px, Py, Pz represent their prices respectively.

In the case of one commodity, a consumer will maximize his utility when the MU of that commodity equals the price of the commodity, e.g. MUx= Px