Micro Economics

Hints for Unit 4 Assignment Marginal Utility and Satisfaction Maximization

Think of the marginal utility as a SCORE that you give the last ONE of that thing, based on how much satisfaction it gives you.

In the parts of problem 1, make up a score (marginal utility) for the last one of each item, according to what the problem says.

In a., the 2nd pair of sneakers AND the 5th sweater get the SAME SCORE, so make up a number. Maybe you give the 2nd pair of sneakers a score of 50 AND you also give the 5th sweater a score of 50.

Next, divide that score you gave for the 2nd pair of sneakers by the price of sneakers to get the 2nd pair of sneakers’ marginal utility PER DOLLAR. Next, divide the score you

gave the 5th sweater by the price of sweaters to get the 5th sweater’s marginal utility per dollar. Are those answers the same? If not, which item should more be purchased and which item should less be purchased to make those answers as close to the same as is

possible. ===============================================

Remember that a person MAXIMIZES their utility when the marginal utility PER DOLLAR of the last one of each item purchased IS THE SAME.

Remember that the law of diminishing marginal utility says that one MORE of an item will give LESS marginal utility (satisfaction score), and conversely, one LESS of

that item will have MORE marginal utility (satisfaction score). Remember that ANY combination of items that does NOT produce the equal marginal

utility per dollar will yield LESS total utility than the ideal combination. ================================================

In part b., the 20th pencil gets a score (you make up the number) and the 6th pen gets a score that is FIVE times as large as the score you made up for the 20th pencil. Now do

the division by the price of each to see if the answers are the same In part c., the 2nd soccer ticket gets a score (you make up the number) and the 3rd

football ticket gets a score that is TWICE as much as the score you made up for the 2nd soccer ticket. Now do the division by the price of each to see if the answers are the same, or not.

If the answers in a, b, or c are not the same, using the law of diminishing marginal utility, which item should you purchase more of (if you have enough budget left) or

which item should you purchase less of.