Question

The efficiency standard assumes equal marginal utility among individuals. What does equal marginal utility mean? Discuss in terms of a rich and a poor person. Remember what “marginal” means.

Answer 1

The efficiency standard makes an assumption of equal marginal utility among individuals. Marginal utility can be defined as an additional satisfaction that a buyer receives with the consumption of an additional unit of a product or service. To maximize the satisfaction the consumer should spend his limited income in an approach that provides him equal marginal utility. However the marginal utility of income to the poor will be higher than the marginal utility of income to the rich; and consequently the wealth transfer from rich people to poor people would turn the public better off in the aggregate. The poor people are more likely o spend their extra income on food and necessity thins; while the poor are more likely to invest them and less likely to consume their extra dollars. Therefore the rich tends to transform those extra dollars into even more dollars and therefore would make a progress for the entire society