Answer to Question #145137 in Microeconomics for Tony Wang

Question

Explain the economic decision making that a consumer undertakes to maximize their satisfaction when buying goods or services. Be sure to use the MU/P model that was introduced in class. Explain the model used and be sure to describe the substitution and income effects connected to a change in the price of one of these goods. I think that this is easier to do with a specific, relevant example.

Answer 1

Marginal utility theory attempts to critically examine the increase in consumer satisfaction that is normally gained from the consumption of an extra unit of a good or service. The pleasure, happiness, and the satisfaction derived from the extra services and goods are referred to as the utility. Economists suggest that the marginal utility is varied as most often we get diminishing marginal utility. For instance, the first piece of chocolate cake gives more utility than the seventh piece. For consumer’s satisfaction t, they can only be allowed one extra unit. Addition of units more than one will make them feel unsatisfied because of the diminishing marginal utility law. For instance, if a piece of cake cost £0.90, it would make sense to consume two pieces, and it makes the consumers feel happy because, in essence, that single piece gives 120p of utility, which is a bit much greater than that of the price of 90p. The second piece after purchase offers a utility that is the same or equal to the price, while the third piece would offer a marginal utility of 60p, which is far much less than the second piece of a cake. Consumers will tend to purchase more in cases where they only get one extra unit to feel happy and satisfied.