Utility vs. Marginal Utility • Utility ○ arbitrary measure of benefit one receives from an activity (measured in utils) • Marginal Utility ○ change in total utility generated by consuming one additional unit of that good or service ○ Air, for example, is necessary for survival but tends to have little value in terms of marginal utility. ○ Diamonds, on the other hand, provides lots of marginal utility for many consumer. Marginal Utility Per Dollar • The marginal utility per dollar spent on a good considers budge constrains • Formula: ○ 〖MU〗_good/P_good • We are constrained by a budget. • The role of scarcity comes into play when making consumer choices. • Example: ○ We prefer a vacation to Hawaii over a movie, but we must consider the cost of each decision. ○ If Hawaii’s marginal utility is 500 but costs $500, and a movie’s marginal utility is 50 but costs $10, what do we choose? ○ Marginal Utility Per Dollar for Hawaii: 〖MU〗_good/P_good =500/500=1 ○ Marginal Utility Per Dollar for movie: 〖MU〗_good/P_good =50/10=5 ○ Since 5 1, choose movie Diminishing Marginal Utility • As a person increases consumption, there is a decline in the marginal utility from consuming each additional unit of that product. • You get less
