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In: Economics

how to maximize marginal utility per price for a good?

how to maximize marginal utility per price for a good?

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Expert Solution

Utility values can be determined by an individual ranking his/her preferences from least preferred to most prefer. The resulting ranking or utility values are subjective or individual. They are also ordinal rather than cardinal. Ordinal means that the utility values simply define a ranking of preferences rather than an actual cardinal measurement. Marginal utility tells how much marginal value or satisfaction a consumer gets from consuming an additional unit of good. The marginal utility is the satisfaction gained from each additional bite. As more of the good is consumed, we gain less additional satisfaction from consuming another unit.  Microeconomic theory states that consumer choice is made on margins, meaning consumers constantly compare marginal utility from consuming additional goods to the cost they have to incur to acquire such goods. A consumer buys goods as long as the marginal utility for each additional unit exceeds its price. A consumer stops consuming additional goods as soon as the price exceeds the marginal utility.


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