Utility Assignment

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Utility Assignment

In economics the law of diminishing marginal utility states that as a person continues or increases consumption of a product while other things are kept constant, or while keeping the consumption of other products constant, there is a decline in marginal utility that someone gets from consuming an additional unit of that same product. Like in our case here when I first took my piece of hot fudge, I was really thirsty and eager to have a bite. And it tested so sweet. The feeling was so great. But with the second fudge, the feeling was not as great as the first fudge. And as I had the third fudge, the level of satisfaction grew even lower.

Utility is the amount of satisfaction a person gets from consumption of a certain commodity. Marginal utility on the other hand is the addition made to the total utility that is after considering consumption of one more unit. In general the wants of an individual human being are unlimited but they are satiable. This bring is a situation where the more we have a particular commodity the less we want to have more of it and as the amount consumed of a commodity increases, the utility derived from its additional units by the consumer decreases more and more. If it were to be presented on a graph then the law of diminishing marginal utility explains the downward sloping demand curve.

Emilio’s Pizza in Commack

The quantity demanded is always less at higher prices than at lower prices. When prices are low people tend to buy more and more. Looking at any demand schedule developed from a demand curve one would realize that typically there is an inverse relationship between prices of a product and the quantity demanded. Looking at a demand curve you will generally see a negative gradient that clearly explains the inverse relationship between the quantity demanded and price. The three methods of explaining this are: the law of diminishing marginal utility, the income effect and the substitution effect.

The income effect and substitution effect are also useful when explaining the reason as to why demand curves slopes downwards. Assuming that we have fixed money income, the income effect gives a suggestion that as the prices of goods and services falls, meaning real income, what the consumers are able to purchase with their money income will rise and this will lead to consumers increasing their demand. Just like in the case above where the prices of porter steakhouse falls from $12 when the consumer could only buy 5 units per month, to $7 making the consumer to now afford 7 units per month.

Looking at the substitution effect, as the prices of goods fall, they become they become relatively less expensive. Take an assumption its alternates products are at the same price, these goods will appear cheaper at lower prices and the consumers will switch from the expensive to the cheaper ones. It is worth noting that the changes in the prices of any resources, both income and substitution effect will be triggered.

a – The more Mabel exercises, the more she enjoys each additional visit to the gym. This means that he has an increasing marginal utility. Like in the case of Mabel here, her main aim is to gain physical fitness and this can be achieved by visiting the gym frequently. The more she sees improvement in her physical fitness the more she wants to visit the gym. This is a clear indicator of increasing marginal utility.

Although Igor’s classical CD collection is huge, his enjoyment from buying another CD has not changed as her collection has grown. Igor has a wider collection of CD that she is not eager to purchase additional even with additional money in his pocket. He has no enjoyment in the purchase of additional CD. This means that his marginal utility on CDs has become constant. Another name for referring to this situation of marginal utility is Zero Marginal Utility.

When Dexter was a struggling student, his enjoyment from a good restaurant meal was greater than now, when he has them more frequently. 15 points.

Dexter’s situation explains better what is meant by Diminishing Marginal Utility. This is a situation where as more and more units of a product are being consumed by customers, his level of interest reduces in that particular commodity. When he was a student, he was struggling to make ends meet and he had no enough money to frequently enjoy meals from good restaurants. Now that Dexter can afford the meals frequently his level of interest has reduced.

There is an inverse relationship between price and quantity demanded in the law of diminishing marginal utility. As a product is consumed more and more, its additional benefit to the person consuming it drops slowly by slowly. Therefore the consumer may be willing to pay less. Emilio’s café knows very well that in order to attract more customers, they must lower the prices of their pizzas as the quantity purchased increases. This gives an indication that customers will enjoy their first few Pizzas and as the quantity consumed increases, few will be willing to pay more money for Pizzas since their marginal utility will be diminishing. They therefore must offer an attractive price to capture the attention of the customers. A slice of pizza costs $3, however if a customer is willing to take more there is a discount offered. For example a whole pie of 9 slices will cost a customer only $18 instead of $27.

A monthly budget is a plan on how to allocate income in order to meet the expenses that one is faced with effectively for the designated month. A budget should be looked at as a spending plan point of view rather than a spending constraint. A good budget allows a person to enjoy things without worrying about meeting other financial obligations. A monthly budget should consist of a list that describes the sources of income of a person and the possible expenses. The budget is always an estimate but one should make sure the estimate is as educated s possible. In order to gain wealth and stay out of debt, one should spend less than he earns. A personal budget can help one achieve that goal.

In the case at hand consumption bundle 1 where Bruno has an income of $ 60 and a CD cost $10 and a note book $2. This bundle contains 3 CDs and 15 notebooks. This bundle will consume the whole of Bruno’s income and therefore does not lie in his budget line.

Consumption bundle C- with an income of $50 and the cost of a CD is $20 and that of a note book is $10 will and requires for 2 notebooks and 2 CDs, will result in Bruno over withdrawing his account. The total budget estimate here is $60 and the income is only $50. This means that the bundle is not in Bruno’s budget line. We are therefore left with consumption bundle B with an income of $110 and the total budget estimate of $80 leaving Bruno with an extra $30 on top. This bundle is within Bruno’s budget line because it requires 3CDs at a cost of $10 per piece and 10 notebooks at a cost of $ 5 per piece making the total budget to be $ 80 against Bruno’s income of $ 110.

Purchasing a newspaper using the machine can be quit challenging because when money is inserted into the machine to purchase the newspapers, its door will open and you have the chance to take more than 1 newspaper. But the situation here is that whether you take 1 or 10 magazines, there is typically little to no satisfaction in having more than one edition of the same print or magazine. The contents are the same and therefore only 1 copy will do the trick. On the other hand an extra copy may be a burden to the person taking the newspaper since it will be difficult to carry. If for some reason a person has recei9ved two magazines of the same edition instead of one, the person will enjoy going through and reading the first copy but gains no satisfaction in reading the second copy. This law is known as neutral marginal utility or zero marginal utility.

On the other hand candy machines are designed for dispensing only I bar at a time. With things like chocolate candy bars and sodas, consumption of more than 1 can bring additional satisfaction that a consumer should account for. Unlike newspaper machines, candy machines dispense only one bar at a time.

References

Easterlin, R. A. (2005). Diminishing marginal utility of income? Caveat emptor. Social Indicators Research, 70(3), 243-255.

Rios, M. C., McConnell, C. R., & Brue, S. L. (2013). Economics: principles, problems, and policies. McGraw-Hill.