discussion question 466

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Utility Maximization

One of the main principles behind mainstream, neoclassical economic theory, is that individuals act to maximize their utility. Utility is generally defined as a satisfaction (pleasure) that an individual derives from consuming or using a specific good or service. Total utility indicates the total amount of satisfaction or pleasure an individual derives from consuming some specific quantity of a good or service. Marginal utility refers to the additional satisfaction a consumer gets from an additional unit of a good or service she/he consumes during a given period of time.

The law of diminishing marginal utility states that as an individual consumes more and more units of a specific good or service, the additional utility the consumer derives from the successive units keep on diminishing (declining) over time. Thus diminishing marginal utility explains a lot about consumer behavior in the market economy.

  • Select a specific consumer behavior and construct a “mini case study” that highlights the workings of marginal utility and how it affects the consumption pattern for goods and services.
  • Explain the roles total utility and marginal utility play to understand change in the consumer’s behavior and preferences.
  • Does the law of diminishing marginal utility hold for all goods and services we buy and consume? What are the exceptions?
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