Explain why total utility is maximized when the marginal utility per dollar on all goods is equal
What will be an ideal response?
It is easiest to prove that total utility is maximized when the marginal utility per dollar is equal across goods by looking at a situation in which the marginal utility per dollar is NOT equal across goods. If the marginal utility per dollar is 5 for good X and 8 for good Y, then the consumer could reallocate one dollar away from good X (losing 5 units of utility) and towards good Y (gaining 8 units of utility). The net result is a gain of 3 units of utility, for an increase in total utility. Hence whenever the marginal utility per dollar is not equal, the consumer can always rearrange his or her consumption and increase his or her total utility. Therefore the total utility cannot be at its maximum when the marginal utility per dollar differs for different goods. Only when all goods have the same marginal utility per dollar is it impossible for the consumer to reallocate funds and become better off. Hence at this point the consumer must have the maximum total utility.
You might also like to view...
Capital and labor are distinct from technology since ________
A) technology is exogenous B) technology is rival in its use C) capital and labor are physical things D) technology is a physical thing
Perfect price discrimination is the same thing as predatory pricing
Indicate whether the statement is true or false
The price of a bond with a maturity date one time period into the future is equal to its face value
a. multiplier by 1 - r. b. multiplied by 1 + r. c. divided by 1 + r. d. divided by 1 - r.
A fall in investor confidence causes the equilibrium level of output to fall
What will be an ideal response?