1. Copyright © 2005 Pearson Education Canada Inc.
Utility Theory
Utility
The want-satisfying power of a good or service.
Utility Analysis
The analysis of consumer decision making based on utility maximization.
Util
A representative unit by which utility is measured.
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2. Copyright © 2005 Pearson Education Canada Inc.
Utility Theory
Marginal Utility
The change in total utility due to a one-unit change in the quantity of a good or service consumed.
Change in number of units consumed
Change in total utility
Marginal utility 
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3. Copyright © 2005 Pearson Education Canada Inc.
Utility Theory
Number of
Videos Total Utility Marginal Utility
Watched per Week (utils per week) (utils per week)
0 0
10 (10 - 0)
6 ( )
3 ( )
1 ( )
0 ( )
-2 ( )
1 10
2 16
3 19
4 20
5 20
6 18
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4. Utility Theory Total Utility of Watching Videos 20 18 16 14 12 10 8 6
Total Utility (utils per week) 10 8 6 4 2 1 2 3 4 5 6 7
Videos Watched per Week
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5. Utility Theory Marginal Utility of Watching Videos 1 2 3 4 5 6 7 10 8
Marginal Utility (utils per week) 2 1 2 3 4 5 6 7 -2 -4
Videos Watched per Week
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6. Videos Watched per Week Total Utility (utils per week)
Utility Theory
Total utility is
maximized...
Videos Watched per Week
Total Utility (utils per week) 1 2 3 4 5 6 7 8 10 12 14 16 18 20 10 8 6 4
Marginal Utility (utils per week) 2
…where marginal
utility equals zero. 1 2 3 4 5 6 7 -2 -4
Videos Watched per Week
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7. Diminishing Marginal Utility
The principle that as more of any good or service is consumed, its extra benefit declines.
Increases in total utility from consumption of a good or service become smaller and smaller as more is consumed during a given time period.
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