CARDINAL VIEW ABOUT UTILITY MAXIMIZATION

Theory of Consumer Behavior

Calculating Total Utility

It can be found by using the formula of marginal utility.

The formula of Marginal Utility is given as below:

ΔTUX TUX(n)  TUX(n  1)

MUX(n)  
ΔX X(n)  X(n  1)
Whereas;
n = Current value of any variable; n–1 = One step earlier from the current value
TU = Total Utility; MU = Marginal Utility
X = Units of any Good X; Δ = Change / Difference

Now solving the formula for TUX(n)

[X(n)  X(n  1)] x [MUX(n)]  TUX(n)  TUX(n  1)

[X(n)  X(n  1)] x [MUX(n)]  TUX(n  1)  TUX(n)

As the difference between the current (Xn) and one step previous (Xn-1) units of good X is equal to 1 like
Let n = 1; so,
X(n)  X(n  1)  X(1)  X(1  1)  X(1)  X(0)  1  0  1
Therefore, substituting [X(n)  X(n  1)] = 1; and we get
[1] x [MUX(n)]  TUX(n  1)  TUX(n) or
MUX(n)  TUX(n  1)  TUX(n) or
TUX(n)  MUX(n)  TUX(n  1) => Required Result

Conclusion: Whenever, we want to find out the current value of total utility of any good using tabulated information, then we will add one step
previous value of total utility of that good into current value of marginal utility of the same good.

Resource Person: Muhammad Shahid Hassan Page 1

 CARDINAL VIEW ABOUT UTILITY MAXIMIZATION

Schedule
Table: Law of Diminishing Marginal Utility
Total Utility Calculating MUX (n) using Formula
Units of Marginal Utility Derived Calculating TUX (n) using Formula
Derived From the ΔTUX TUX(n)  TUX(n  1)
any Good From the Consumption of TUX(n) = TUX(n-1) + MUX(n) MUX(n)  
Consumption of
X (X) Good X (MUX) ΔX X(n)  X(n  1)
Good X (TUX)
0 0 – 0 –
Let n = 1
TUX(1)  TUX(1  1)
Let n = 1 MUX(1) 
TUX (1) = TUX (1 – 1) + MUX(1) X(1)  X(1  1)
1 15 15 = TUX (0) + MUX (1) TUX(1)  TUX(0)
MUX(1) 
= 0 + 15 X(1)  X(0)
TUX (1) = 15 15  0 15
MUX(1)    15
1 0 1
Let n = 2
TUX(2)  TUX(2  1)
Let n = 2 MUX(2) 
TUX (2) = TUX (2–1) + MUX(2) X(2)  X(2  1)
2 27 12 = TUX (1) + MUX (2) TUX(2)  TUX(1)
MUX(2) 
= 15 + 12 X(2)  X(1)
TUX (2) = 27 27  15 12
MUX(2)    12
2 1 1
Let n = 3
TUX(3)  TUX(3  1)
Let n = 3 MUX(3) 
TUX (3) = TUX (3–1) + MUX(3) X(3)  X(3  1)
3 36 9 = TUX (2) + MUX (3) TUX(3)  TUX(2)
MUX(3) 
= 27 + 09 X(3)  X(2)
TUX (3) = 36 36  27 09
MUX(3)    09
3 2 1

Resource Person: Muhammad Shahid Hassan Page 2

 CARDINAL VIEW ABOUT UTILITY MAXIMIZATION

4 42 6
5 45 3
6 45 0
7 42 -3

Table: Law of Equi – Marginal Utility

Price of X = PX = 3, Price of Y = PY = 2.5 and Income = I = 13.5

Units of TU of MU of Units of TU of MU of
MUX / PX MUY / PY
Good X Consumed Good X Good X Good Y Consumed Good Y Good Y
0 0 – 0 0 – – –
1 15 15 1 20 20 15 / 3 = 5 20 / 2.5 = 8
2 27 12 2 35 15 12 / 3 = 4 15 / 2.5 = 6
3 36 9 3 45 10 9 /3 = 3 10 / 2.5 = 4
4 42 6 4 50 5 6/3 = 2 5 / 2.5 = 2
5 45 3 5 50 0 3/3 = 1 0 / 2.5 = 0
6 45 0 6 45 –5 0/3 = 0 –5 / 2.5 = –2
7 42 –3 7 35 –10 –3/3 = –1 –10 / 2.5 = –4

Money Spent Money Left Goods Purchased Utility Derived Utility Derived Utility Derived
MUX / PX MUY / PY
After Consuming X After Consuming Y
– – 2.5 =13.5 – 2.5 = 11 Y(1st) 8 5 8
15 / 3 = 5 20 / 2.5 = 8 2.5 =11 – 2.5 = 8.5 Y(2nd) 6 4 6
12 / 3 = 4 15 / 2.5 = 6 3 =8.5 – 3 = 5.5 X (1st) 5 4
9 /3 = 3 10 / 2.5 = 4 2.5 =5.5 – 2.5 = 3 Y (3rd) 4
6/3 = 2 5 / 2.5 = 2 3 =3–3=0 X(2nd) 4
3/3 = 1 0 / 2.5 = 0
0/3 = 0 –5 / 2.5 = –2
–3/3 = –1 –10 / 2.5 = –4
Total 13.5 0 X = 2, Y = 3 27 TUX = 5 + 4 = 9 TUY = 8+6+4 = 18

Resource Person: Muhammad Shahid Hassan Page 3

 CARDINAL VIEW ABOUT UTILITY MAXIMIZATION

TU(X,Y) = TU(2,3) = TUX + TUY = 9 + 18 = 27

Left Income = 0
Last Unit of X = 2nd and Last Unit of Y = 3rd
MUX/PX (Last unit) = 12 / 3 = 4
MUY / PY = (Last Unit) = 10 /2.5 = 4
MUX/PX (Last Unit Consumed) = MUY/PY (Last Unit Consumed)
4=4

Resource Person: Muhammad Shahid Hassan Page 4

 CARDINAL VIEW ABOUT UTILITY MAXIMIZATION

Class Activity
The class activity will be in five steps:
Step – 1: In the step – 1, the information will be completed. Like we will use following formulas to fill the table.

TUZ.B(n) = TUZ.B(n-1) + MUZ.B(n) ΔTU(Z.B) TUZ.B(n)  TUZ.B(n  1)

MUZ.B(n)  
Δ(Z.B) Z.B(n)  Z.B.(n  1)

Step – 2: In the step – 2, the additional columns will be generated by dividing marginal utility of goods on its corresponding prices.
Step – 3: In step – 3, we will generate another table showing the entire procedure via which we will spend our income, balance income,
purchased goods, utility derived and also total utility of each good.

Price of Z.B = P(Z.B) = 300, Price of (F.F) = P(F.F) = 75 and Income = I = 1350
Units of Step – 1 Step – 2
Z.B TU(Z.B) MU (Z.B) Units of F.F TU( F.F) MU (F.F) MU(Z.B)/P(Z.B) MU(F.F) / P(F.F)
0 0 - 0 0 - - -
=(625-0)/
=0+3000 =3000/300 =625/75
1 3000 1 625 (1-0)
=3000 =10 =8.33
=625/1=625
=(5700-3000)/
=625+550 =2700/300 =550/75
2 5700 (2-1) 2 550
=1175 =09 =7.3
=2700/1 = 2700
=(1625-1175)/
=5700+2400 =2400/300 =450/75
3 2400 3 1625 (3-2)
=8100 =08 =6
=450/1=450
=(10290-8100)/
=1625+375 =2190/300 =375/75
4 10290 (4-3) 4 375
=2000 =7.3 =5
=2190/1 = 2190
=(2225-2000)/
=10290+1710 =1710/300 =225/75
5 1710 5 2225 (5-4)
=12000 =5.7 =3
=225/1=225

Resource Person: Muhammad Shahid Hassan Page 5

 CARDINAL VIEW ABOUT UTILITY MAXIMIZATION

Total Total
Step – 3:
Money Goods Utility Utility Derived Utility Derived
MU(Z.B)/P(Z.B) MU(F.F)/P(F.F) Money Left
Spent Purchased Derived After Consuming Z.B After Consuming F.F
- - - - - - - -
=3000/300 =625/75
300 =1350 – 300 = 1050 Z.B(1st) 10 10 8.3333
=10 =8.333
=2700/300 =550/75
300 =1050 – 300 = 750 Z.B(2nd) 9 9 7.3
=9 =7.3
=2400/300 =450/75
75 =750 – 75 = 675 F.F (1st) 8.3333 8
=8 =6
=2190/300 =375/75
300 =675 – 300 = 375 Z.B (3rd) 8 7.3
=7.3 =5
=1710/300 =225/75
75 = 375 – 75 = 300 F.F(2nd) 7.3 - -
=5.7 =3
300 = 300 – 300 = 0 Z.B(4rth) 7.3 - -
TU(Z.B) = 10+9+8+7.3 TU(F.F) = 8.3+7.3
Total 1350 0 {Z.B = 4; F.F=2} 49.9
= 34.3 = 15.6

Step – 4:
Optimum Commodity Combination:

After consuming 4 units of zest burger and 2 units of French fries, the utility maximizing principle is satisfied which could be viewed as below:

MU(Z.B)/P(Z.B) (Last Unit Consumed) = MU(F.F) / P(F.F) (Last Unit Consumed) => Utility Maximizing Principle
Last Unit of Z.B = 4rth ; Last Unit of F.F = 2nd and Left Income = 0
MU(Z.B) / P(Z.B) (Last unit) = 2190 / 300 = 7.3
MU(F.F) / P(F.F) = (Last Unit) = 550 /75 = 7.3
7.3 = 7.3 => Required Result

Conclusion: Hence we may conclude that {4 units of Zest Burger, 2 Units of French Fries} will be called as optimum commodity combination
because at these units utility maximizing principle is satisfied.

Resource Person: Muhammad Shahid Hassan Page 6

 CARDINAL VIEW ABOUT UTILITY MAXIMIZATION

Step – 5:
Maximum Utility:
As we know that a utility will be called as maximum utility if utility maximizing principle is satisfied here. In present case, utility maximizing
principle is satisfied therefore,
As’
MU(Z.B)/P(Z.B) (Last Unit Consumed) = MU(F.F) / P(F.F) (Last Unit Consumed)
2190 / 300 = 550 /75
7.3 = 7.3
So,
Maximum Utility = Total Utility Derived from Zest Burger + Total Utility Derived from French Fries
U(Max) = 34.3 + 15.6
U(Max) = 49.9
Or
TU(Z.B,F.F) = TU(4,2) = TU(Z.B) + TU(F.F) = 34.3 + 15.6 = 49.9

Resource Person: Muhammad Shahid Hassan Page 7

 CARDINAL VIEW ABOUT UTILITY MAXIMIZATION

CLASS ACTIVITY – 2

Course Title: Microeconomics Course Code: EC – 210

Program: BBA(H)/BS-SE(H) Time: 30 min
R. Person: Muhammad Shahid Hassan Marks:

Name:__________________________ I.D#_____________________
Date: __________________________ Section:____________________

______________________
Signature of the student
Mr. Usama Bin Masood Querashi has received Rs. 36 as his pocket money from his father for the month of May, 2020 to consume on two goods
such as Zest Burger and French Fries. The price for Zest Burger is Rs. 4.5 per burger and the price for Fries is Rs. 4.5 per packet. The marginal
utilities derived from the consumption of both goods are given as under:

Units of Money TU of Zest Burger MU of Zest Burger

TU of Fries MU of Fries
0 - -
1 63 21
2 56 39
3 164 15
4 36 66
5 227 9
6 245 6
7 9 84
8 0 84
9 245 -9 -3
10 227 -6

Resource Person: Muhammad Shahid Hassan Page 8

 CARDINAL VIEW ABOUT UTILITY MAXIMIZATION

Being a student of Fundamentals of Economics, help Mr. Usama Bin Masood Querashi that
1. How could he complete the table of total and marginal utilities of both commodities?
2. How could he interpret the relationship between total utility and marginal utility of both goods?
3. How could he find a combination of both commodities that satisfy Mr. Usama Bin Masood Querashi the most?
4. What is the maximum utility that he is going to face at the optimum commodity combination?

Resource Person: Muhammad Shahid Hassan Page 9