Question

Explain why a rational consumer who had diminishing marginal utility for a good would not consume an additional unit when it generates negative marginal utility, even when that unit is free. Include an example in your explanation. (minimum 200 words)

Answer 1

A rational consumer will only consume the goods when it is generating a positive total utility i.e. the benefit that the consumer is gaining from consuming the goods is more or equal to the price of the good. When the marginal utility terns negative or we can say that the person consuming the goods is not getting any benefit but it is causing some harm, the total utility that the consumer has received will start declining.

IF the marginal utility is in negative even then it is below zero or even of the good is free the consumer will get a total decline in its utility and will not consume it. A rational consumer will always try to match the consumption to the marginal utility and the price. If the price and the marginal utility is equal the benefit is maximum. THe point where the marginal utility is less than the price the consumer's total utility has maximised and anymore consumption will cause a decline in total utility.