At the optimal choice, the ratio of utilities between two goods should be
1
. Otherwise, further utility could be gained by substituting one good for the other.
When the ratios of the marginal utility to the price of goods are equal you’re maximizing utility?
When the ratios of the marginal utility to price of the two goods are equal, you’re maximizing utility. Consumer doesn’t have to reach this point because of budget constraints. If there is diminishing marginal utility and the price of a good goes up, we consume less of that good.
What is the rule relating the ratio of marginal utility?
It means the rule is that the marginal utility per unit for both the goods must be the same, or the ratio of utilities between the
two goods should be equal to 1
.
Would you expect marginal utility to rise or fall with additional consumption of a good?
In general,
greater consumption of a good brings higher total utility
. However, the additional utility received from each unit of greater consumption tends to decline in a pattern of diminishing marginal utility.
What is the key assumption about marginal utility?
The key assumption of marginal utility theory is that
the household chooses the consumption possibility that maximizes total utility
. The Utility-Maximizing ChoiceWe can find the utility-maximizing choice by looking at the total utility that arises from each affordable combination.
Is it possible for total utility to increase while marginal utility diminishes explain?
Is it possible for total utility to increase while marginal utility diminishes? Explain. Yes, this
is diminishing marginal utility
. Each additional utility brings a smaller gain than the next one, but the total utility still increases.
What factors might a behavioral economist use to explain savings decisions?
What factors might a behavioral economist use to explain savings decisions?
An individual’s time preferences
, along with expected interest rates and the opportunity costs of spending now versus later all play a role in saving.
What is utility maximization rule?
The Utility Maximization rule states:
consumers decide to allocate their money incomes so that the last dollar spent on each product purchased yields the same amount of extra marginal utility
. … It is marginal utility per dollar spent that is equalized.
How do you maximize utility?
Through maximizing utility,
the consumer will buy an item that produces the greatest marginal utility with the least amount of spending
. For example, if product ‘A’ comes with twice more marginal utility than product ‘B,’ that means product ‘A’ is providing more marginal utility per dollar than ‘B.
How do you allocate income to maximize utility?
utility maximizing rule
To obtain the greatest utility the consumer should allocate money income so
that the last dollar spent on each good or service yields the same marginal utility
.
What happens to marginal utility with additional consumption of a good?
The law of diminishing marginal utility states the marginal utility from an additional unit of consumption
declines as the quantity of consumed goods increases
. Consumers choose their baskets of goods by equating marginal utility of a good to its price, which is a marginal cost of consumption.
Who determines how much utility and individual will receive from consuming a good?
Individuals are the only judge of their own utility
. In general, greater consumption of a good brings higher total utility. However, the additional utility received from each unit of greater consumption tends to decline in a pattern of diminishing marginal utility.
What is the total utility at the optimal consumption bundle?
An individual chooses the consumption bundle that maximizes total utility, the optimal consumption bundle. The optimal consumption rule says that at the optimal consumption bundle
the marginal utility per dollar spent on each good and service
—the marginal utility of a good divided by its price—is the same.
Which best describes the relationship between total utility and marginal utility?
Which best describes the relationship between total utility and marginal utility? Multiple choice question.
Total utility reflects the changes in marginal utility
. Marginal utility reaches zero when total utility is at a minimum.
Which of the following is an assumption of marginal utility theory?
Following are the assumptions in the law of diminishing marginal utility:
The quality of successive units of goods should remain the same.
… Consumption of goods should be continuous. If there comes a substantial break in the consumption of goods, the actual concept of diminishing marginal utility will be altered.
Can marginal utility negative?
Marginal utility is the added satisfaction a consumer gets from having one more unit of a good or service. … The law of diminishing marginal utility is often used to justify progressive taxes.
Marginal utility can be positive, zero, or negative
.
