Question

After viewing the video clip from Cool Hand Luke, first consider how marginal benefits and marginal costs fit in to Luke’s decision, and how the concept of diminishing marginal utility is at work as Luke eats more and more eggs. What is driving his marginal benefits to continue to exceed his marginal cost? Consider how Luke’s decision would change if he had to actually pay for each egg he eats. How would this affect his choice to continue eating? Consider the concept of marginal utility per dollar spent (i.e. MU/p) and how it affects the consumption decisions we make. Have you ever had a time where you actually bought your second choice rather than your first choice? That is, can you think of a time where it wasn't only about marginal utility for you, but about marginal utility per dollar spent? Explain.

Answer 1

• Initially higher consumption leads to higher utility and the marginal benefit is greater than the marginal cost.
• If he had to pay for each egg he is consuming then he would consume till the dollar worth of additional satisfaction is equal to the marginal utility of money. Thus his consumption will not go beyond this point.
• The marginal utility per dollar spent is the marginal utility obtained from the last unit of a good consumed divided by the price of the good. At the equilibrium, the marginal utility per dollar spent must equal the marginal utility of money. If (MU/P) is less than MUmoney, then we can consume more till (MU/P) = MUmoney. There can be times when we may buy our second choice than our first choice due to the consideration of the marginal utility of the dollar spent. For example, in case of consuming ice cream that is being sold at $20 and the marginal utility of $1 is 4, the MU should be (20*4) = 80. If already having consumed 3 ice creams, the MU equals 80, then one must stop consuming more. However, if MU is less than 80, one must consume more. Hence the consideration of MUm is essential.