David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

Our theory of consumer choice assumed that consumers can rank different bundles according to the
utility or satisfaction they give. Saying bundle A gives more utility than bundle B just means the consumer
prefers A to B. We do not need to know by how much A is preferred to B. Higher indifference curves are
better. We do not need to know how much better.
Nineteenth-century economists believed utility levels could actually be measured, as if each consumer had
a utility meter measuring his happiness. The further to the right the needle on his utility meter, the happier
he was. The units on this meter were traditionally marked off in utils. Nowadays, this seems a bit strange:
are you 2.9 times as happy if you get an extra week's holiday?
Even so, analysis of consumer choice when utility is measurable is quite interesting, even though we
derived all the main propositions in the text without this extra assumption. The (robot-like) individual
whose utility is exactly calibrated in utils we shall call Fred.
Fred goes to rock concerts and eats hamburgers. For a given consumption of one
of these goods, he prefers more of the other to less. His utility goes up. If Fred gets
67 utils of utility from consuming 10 hamburgers and 1 rock concert, and 70 utils
from 11 hamburgers but still 1 rock concert, his marginal utility from the eleventh
hamburger is (70 - 67 =) 3 utils.
Fred was not very hungry. He had 10 hamburgers at his only concert. He didn't get
much from an eleventh hamburger, only an extra 3 utils. In contrast, if Fred had
only 2 hamburgers at one concert (giving him, say, 20 utils), he might rather have
enjoyed a third hamburger (taking his utils to, say, 27). The marginal utility of that
extra hamburger is (27 - 20 =) 7 utils. Fred's tastes obey the law of diminishing
marginal utility.
The marginal utility of a
good is the increase in total
utility obtained by consuming
one more unit of that good,
for given consumption of other
goods.
A consumer has diminishing
marginal utility from a good
if each extra unit consumed,
holding constant consumption
of other goods, adds
successively less to total utility.
Figure 5.Al plots Fred's marginal utility of hamburgers. He gets fewer extra utils
from extra consumption of hamburgers, the more he is already consuming: his marginal utility schedule
MU slopes down.
Fred has a given income to spend. Once we know the prices of rock concerts and hamburgers, we can
work out his budget line. How does Fred choose the affordable point on this line at which to consume? He
maximizes his utility.
The price of hamburgers in pounds is PH and the price of concerts is Pc· If MU H is Fred's marginal utility
from another hamburger, he gets an extra MUH/PH utils for each extra pound spent on hamburgers and
an extra MU cl Pc utils for each extra pound spent on concerts.
Suppose MUH/PH exceeds MUclPc. An extra pound spent on hamburgers raises Fred's utility more than
does an extra pound spent on concerts. If Fred spends £1 more on hamburgers but £1 less on concerts, his
total utils rise: he gains more from hamburgers than he loses from concerts. He can increase utility without
spending more. He will always want to transfer spending towards the good that yields more marginal utility
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