Utility and Demand Theory Term Paper Example | Topics and Well Written Essays - 1750 words

Utility and need Theory - Term Paper ExampleMarginal utility is an important concept when analysing the demand theory, bare(a) utility refers to the additional utility derived from the consumption of one excess unit of a good.From the above chart and table it is evident that total utility increases but at a decreasing rate, this is because there is a decline in the marginal utility or the additional utility gained from the consumption of one extra unit of a good.The utility theory is based on a number of assumptions and they include the pursuance I. Consumers aim at maximising their utility take. Consumers will prefer more of a good than less. When we accept good Y and X the consumer will prefer X to Y or Y to X.IV. If the consumer prefers Y to X, and that he or she prefers X to K then the customer prefers Y to K.V. The consumers experience diminishing marginal utility when the number of units of a good increasesThe number of units of goods consumed will be determined by the l evel of income, the level of income will determine the maximum number of units that can be purchased and therefore this aids in the development of a budget line. The opportunity cost will also determine the number of units consumed of a good, and finally, the number of units consumed will be determined by the level of utility derived. (Neumann, J, 2000)Given two goods Y and X and given that the price of X = 10 and price of Y = 15, also given that the level of income is one hundred fifty then the budget line will be determined as follows.