Utility Law of Diminishing Marginal Utility

Because additional units yield less and less utility, the consumer is willing to pay less and less for the product

Utility Maximization We can agree that a car gives us greater

utility than a pack of gum However, this leaves an important

component out of decision making with regard to purchasing products

Price plays a major role in our decisions to purchase.

Utility per dollar is a more accurate measure of satisfaction

If a person receives 10,000 units of satisfaction from a $30,000 car and 1 unit of satisfaction from a $.40 pack of gum; which is a better value for your money?

The car gives us .33 units of utility for each dollar spent; the pack of gum gives us 2.5 units for each dollar spent.

The gum is a better purchase in this case.

Marginal Utility Per DollarMarginal Utility Per

Dollar To calculate MU/$

just divide the marginal utility by the purchase price

With a budget of $10, what would be the purchases made?

Hint: Your first purchase will be the one that gives you the MOST MU/$.

Why does water cost less than a diamond when water is essential and diamonds are luxury items?

MU MU/$ MU MU/$10 248 207 186 165 124 63 4

Product APrice $1

Product BPrice $2