Answer to Question #190814 in Microeconomics for Bornface

Question

Define marginal utility. Provide an argument why to maximize total utility of good x and good y, the consumer should consume until the ratio of marginal utilities over price is the same across both goods. [6 marks]

Answer 1

Suppose a consumer spends a certain part of his income on the purchase of goods X and Y. The question arises, for how many goods X and Y should the buyer demand in order to maximize his utility? Suppose that at first, the consumer evaluates the marginal utility of good X more than good Y. Then he begins to increase consumption of good X and reduce consumption of good Y. But according to the law of diminishing marginal utility, with an increase in the consumed amount of good X, his marginal utility begins to decrease, and the marginal utility product Y - to increase.

In the end, the equality of estimates of the marginal utilities of goods X and Y should be established. In such a situation, the consumer will not spend a dollar more to purchase an additional quantity of goods X, and not a dollar less to reduce the amount of consumed good Y. An ideal situation is created when it is unprofitable for a person to consume one good instead of another and in general, somehow change the structure of consumption. Any change will only lead to a deterioration in his welfare, that is, the buyer is inclined to change the structure of consumption, switching from one product to another, consistently moving towards a state where nothing needs to be changed. In this state, equality of estimates of the marginal utility of goods X and Y is achieved.