Question

Compare and contrast the impact of a change in the price of a good on the utility-maximizing bundle of goods with the impact of a change in the price of input on the output maximizing and cost-minimizing bundles of inputs.

Answer 1

As we know that there is an inverse relationship between price and demand with other things being constant. When the price of a particular good increases, its demand decreases andd vice versa. Utility as we know is the want satisfying power of a good. The utility of a good goes on decreasing as se consume more and more of a good. It means marginal utility is on decrease. The price a consumer is willing to pay for a good depends on his marginal utility, which declines with each additional unit of consumption, according to the law of diminishing marginal utility. Therefore, the price decreases for a normal good when consumption increases. When the price of a good increases, it will definetly affect the utility of the good. There are two types of utility as total utility and marginal utility. Total utility increases but at a decreasing rate. Economists use the term utility as a measure of satisfaction, joy, or happiness. How much satisfaction does a person gain from eating a pizza or watching a movie? Measuring utility is based solely on the preferences of the individual and has nothing to do with the price of the good.

Cost minimisation is one of the important tools to maximise the utility of the firm. The firm minimises the cost, in order to maximise the profit level of the firm. The firm always strive to minimize the costs of production and to maximize the output. Cost and the input demand correspondence are formally defined and the fundamental implications for them of the price-taking cost minimization behavioral postulate are established, including the Law of Demand for conditional demands. These implications are mostly reinterpretations of the implications of the price-taking profit maximization behavioral postulate. Cost-minimizing behavior is shown to be part of profit-maximizing behavior and is useful even when price-taking output selection to maximize profit may not be an appropriate behavioral postulate. The envelope relationship between the cost function and cost objective is explained, leading to the relationship between cost and input demand known as Shephard’s Lemma, and the symmetry and negative semidefiniteness of the matrix of demand price slopes. Cost minimization is a basic rule used by producers to determine what mix of labor and capital produces output at the lowest cost. In other words, what the most cost-effective method of delivering goods and services would be while maintaining a desired level of quality.