- [Instructor] Here we have
an actual free response
question from a previous
AP economics exam.
And it tells us, utility
and price elasticity
of demand are important concepts
in explaining consumer behavior.
I buy that.
Now, part A, they say
define marginal utility.
So before I do that, pause the video
and at least think about it.
How do you define it in your head?
Or even better, try to
write it down in words
because this is what you would actually
have to do on an AP exam.
So we have defined it in
previous videos in more depth,
but if I were taking the exam,
I would write something like,
the incremental,
incremental benefit,
or gain, or satisfaction,
satisfaction
from one more unit,
from one more unit
of something.
I think that is a good definition
of a shorthand for marginal utility.
And the marginal tells us that's what's
for the next thing, not in total,
but just for the next thing
that you're gonna get,
how much gain or satisfaction
are you going to have.
Now let's try part B.
The table below shows
the quantities, prices,
and marginal utilities of two goods,
fudge and coffee, which Mandy purchases.
So we see, I guess so far she's bought
10 pounds of fudge and
seven pounds of coffee.
Fudge is $2 a pound.
Coffee is $4 a pound.
And then the marginal utility
of the last pound of fudge
is 12, is 20 for coffee.
And this is interesting because you notice
marginal utility doesn't have units.
It tends to be unit-less
or it kind of has your
marginal utility units.
And what matters more
is how it might compare
from the first pound to the second pound,
as opposed to the absolute value here.
But we're gonna, I'm suspecting
before even reading this,
that we're gonna make
use of this in some way
in this next part of this question.
Mandy spends all her money
and buys only these two goods.
In order to maximize her utility,
maximize her utility,
should Mandy purchase more
fudge and less coffee,
purchase more coffee and less fudge,
or maintain her current consumption?
Explain.
Okay, so some of you
might immediately say,
all right, I'm just gonna look at
how much gain, satisfaction she gets
for the next pound of coffee
versus the next pound of fudge.
It looks pretty clear
that 20 is higher than 12.
And so you'd say, all right,
she should just buy more coffee.
But that would be a mistake.
And to realize it, let me
give you another example.
If your marginal utility
of a Rolls-Royce is going to be higher
than your marginal
utility of a strawberry,
so if you use that logic that you just
directly compare marginal utilities,
you would always buy more
Rolls-Royces and less strawberries.
And the key idea here is, what matters is
marginal utility per dollar,
or marginal utility divided by price.
Then, all of a sudden,
a strawberry might be able to compete
a little bit more with a Rolls-Royce.
So we want to do the
exact same thing here.
And on a test like the AP exam,
you definitely wanna show your work.
So let's say for fudge, for fudge,
we could calculate the marginal utility
per price is going to be equal to,
here they give the
utility of the last pound.
I guess this could be indicative
of also the next pound.
So this is going to be 12 divided by $2,
which is equal to six.
And then for coffee, coffee,
it is the marginal
utility divided by price,
is going to be equal to 20
divided by four, which is equal to five.
And so I would say that Mandy,
so I would circle that,
and I would say, so I would say,
Mandy should buy
or purchase more fudge,
buy more fudge
to maximize her utility because
the marginal utility per dollar
is higher than coffee.
And we'd be done.
