Question

1. Think of an example of when you experienced diminishing marginal utility? Explain in detail how and why your marginal utility diminished upon continued consumption of the good/service. What happened to your total utility and you continued to consume the product?

2. Provide an example of irrational behavior. Which category of irrational behavior could explain this action? Explain in detail.

Assignment must be 250 words minimum and answered in complete sentences. Please answer both of the following questions in detail:

Answer 1

1) Let us take the example of drinking water when we are too much thirsty . When we are too much thirsty , the first glass of water has the highest utility . Then we take second glass of water . During second glass of water the total utility of 2 glasses of water is higher than utility of the first 1 glass of water but the marginal utility or the extra utility received from the second glass is lesser than utility received from the 1st glass , this is because after the first glass our thirst is almost quenched . So the second glass is not so much important to us like the first glass . Now if we go on consuming and get the 3rd glass it may be of zero or negative marginal utility to us . Or the third glass may actually not add anything to the total utility of 3 glass or rather reduce the total utility because we may feel nauseatic after drinking so much water .

This is the concept of diminishing marginal utility and total utility of consumption .

2) In consumer behavior we can site several examples of irrationality . The cognitive bias or herding effects are such examples . Let us take the example of herding effect . Sometimes while making consumption decisions people take the path of least resistance and follow the wisdom of the crowd . Like when we buy a car we try to search for models which are most popular in the market . Sometimes to buy the most popular model of car we go beyond our budget and opt for car loans , thus sacrificing future consumption for a luxury item . This is irrationality since utility is maximized based on budget constraint .