Question

For more than 20 years, guests have been looking forward to the annual Never Ending Pasta Bowl® promotion, offering unlimited servings of Pasta, Sauce, and Toppings in a single visit.

In 2014, Olive Garden had an idea unlike any other in the restaurant business. What if there was a ‘season pass’ to Never Ending Pasta Bowl? A pass that let Olive Garden’s biggest fans and pasta lovers visit the restaurant as many times as they wished to enjoy unlimited servings of Never Ending Pasta Bowls, for one set cost? The Never Ending Pasta Pass® was born.

The initial response was unprecedented. In that first year, demand for the limited release of 1,000 Passes was so great it threatened to overwhelm the sales website before quickly selling out. Pasta Pass captivated the country then and continues to do so every year, inspiring conversations across social media, morning news programs, late night talk shows and more.

How is this practice related to diminishing marginal utility? What restrictions must Olive Garden impose on the customer in order to make a profit? Provide some other examples of where the law of “diminishing marginal utility” would apply.

(Lenght: 150 - 250 words)

Answer 1

Diminishing marginal utility states that with increase in units of consumption of a good, derived utility from each successive unit reduces.

The restruant used this strategy of unlimited servings based on diminishing marginal utility. Customers when start consuming a good, they place more utility than utility from consumption after some units consumption. This make them will to spend more at the starting of the consumption. And when they start eating, for each unit of consumption, their utility reduces and soon they reach at level where they get no more utility with more consumption. As no rational consumer would like to get dissatisfied with consumption of pasta after they reach to the limit of zero utility derived, they stop eating.

However, there are certain conditions that the restruant must impose to earn profit from this strategy. These are -

1) Not allowing customers to share plates.

2) Not allowing takeovers. Takeovers will make them pack pasta and would consume later.

3) Time of consumption should be limited as law of diminishing marginal utility occurs when consumption is continuous.

Other examples where law of diminishing marginal utility applies -

1) Taking shower to reduce fatigue.

2) Eating hamburgers at lunch