Microeconomics the Concept of Marginal Utility Reflects Essay

  • Length: 2 pages
  • Sources: 3
  • Subject: Business - Advertising
  • Type: Essay
  • Paper: #20425839
  • Related Topics: Boat, Fixed Costs

Excerpt from Essay :


The concept of marginal utility reflects the additional utility that a buyer receives for an additional unit of a good. In this example, Amy is spending an extra dollar if she buys either a bracelet or a soda. If she has an extra dollar, however, she is likely to purchase a soda. This is because the marginal utility of a soda at this point is 40, whereas an extra bracelet has a marginal utility of 30. The rational consumer is going to put their extra financial unit to whatever purchase will maximize utility.

If these utility figures hold, Amy is not maximizing utility. To maximize utility, Amy would only purchase soda since soda has a higher marginal utility than a bracelet.

Amy should consume only sodas if the marginal utility of these goods never changes.

Diminishing marginal utility implies that over time the marginal utility of something will diminish. Thus, if Amy buys a soda, she will quench her thirst. The marginal utility of the second soda will therefore be lower than the marginal utility of the first soda. By the fourth or fifth soda, the marginal utility is likely to be very low for soda. However, the marginal utility of bracelets is likely going to decline at a much slower rate, because she can fit many bracelets on her arm and there are fewer costs associated with additional bracelets (like getting full).

5. The total utility received will increase over time, until such point as the marginal utilty of an additional good is negative. For example, after five sodas, maybe Amy is so sick of soda that to consume another one would actually be negative. Only at that point would the total utility begin to decline, but in general it continues to rise, just more slowly.

6. The total dollars spent will continue to increase as Amy buys more stuff. At some point, the dollar will have more marginal utility than either a bracelet or a soda, and at that point Amy will stop spending. But total dollars spent will increase until there is no more marginal utility left to purchase.

2-6. 1. $450,000


Qty of boats

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Sources Used in Document:


Investopedia. (2013). Law of diminishing marginal utility. Investopedia. Retrieved November 11, 2013 from http://www.investopedia.com/terms/l/lawofdiminishingutility.asp

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