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José clearly prefers point Q to point P. Now repeat this step-by-step process of decision making with marginal utilities. José thinks about giving up the third T-shirt and surrendering a marginal utility of 20, in exchange for purchasing two more movies that promise a combined marginal utility of 27. José prefers point R to point Q. What if José thinks about going beyond R to point S? Giving up the second T-shirt means a marginal utility loss of 21, and the marginal utility gain from the fifth and sixth movies would combine to make a marginal utility gain of 23, so José prefers point S to R.

However, if José seeks to go beyond point S to point T, he finds that the loss of marginal utility from giving up the first T-shirt is 22, while the marginal utility gain from the last two movies is only a total of 19. If José were to choose point T, his utility would fall to 100. Through these stages of thinking about marginal tradeoffs, José again concludes that S, with one T-shirt and six movies, is the choice that will provide him with the highest level of total utility. This step-by-step approach will reach the same conclusion regardless of José’s starting point.

Another way to look at this is by focusing on satisfaction per dollar. Marginal utility per dollar is the amount of additional utility José receives given the price of the product. For José’s T-shirts and movies, the marginal utility per dollar is shown in [link] .

marginal utility per dollar = marginal utility price

José’s first purchase will be a movie. Why? Because it gives him the highest marginal utility per dollar and it is affordable. José will continue to purchase the good which gives him the highest marginal utility per dollar until he exhausts the budget. José will keep purchasing movies because they give him a greater “bang or the buck” until the sixth movie is equivalent to a T-shirt purchase. José can afford to purchase that T-shirt. So José will choose to purchase six movies and one T-shirt.

Marginal utility per dollar
Quantity of T-Shirts Total Utility Marginal Utility Marginal Utility per Dollar Quantity of Movies Total Utility Marginal Utility Marginal Utility per Dollar
1 22 22   22/$14=1.6 1 16 16 16/$7=2.3
2 43 21   21/$14=1.5 2 31 15 15/$7=2.14
3 63 20   20/$14=1.4 3 45 14 14/$7=2
4 81 18   18/$14=1.3 4 58 13 13/$7=1.9
5 97 16   16/$14=1.1 5 70 12 12/$7=1.7
6 111 14   14/$14=1 6 81 11 11/$7=1.6
7 123 12   12/$14=1.2 7 91 10 10/$7=1.4

A rule for maximizing utility

This process of decision making suggests a rule to follow when maximizing utility . Since the price of T-shirts is twice as high as the price of movies, to maximize utility the last T-shirt chosen needs to provide exactly twice the marginal utility (MU) of the last movie. If the last T-shirt provides less than twice the marginal utility of the last movie, then the T-shirt is providing less “bang for the buck” (i.e., marginal utility per dollar spent) than if the same money were spent on movies. If this is so, José should trade the T-shirt for more movies to increase his total utility. Marginal utility per dollar measures the additional utility that José will enjoy given what he has to pay for the good.

Questions & Answers

how to calculate opportunity cost
Vernon Reply
what is supply
Ntwanano Reply
Supply is a fundamental economic concept that describes the total amount of a specific good or service that is available to consumers.
DNA
what price elasticity
Anarfi
how can they any questions in the GCE
Bahbit Reply
the following table shows the cost and revenue data for Molly the monopolistic
Chasha Reply
if the budget line is multiple how do indicate the feasible one?
aminu Reply
economic is a dash science
Yasir Reply
Economics is a social science
Azka
economics is not social science
AZ
economice is a culture science?
Yasir
There are dash factors of production
Yasir
prefectly elastic demandis equal to dash?
Yasir
study related to what ought to be is termed as dash analysis?
Yasir
Whearas economics is a purely social science according to the Austrian School of Economics
Omkar
economic is a social science
falodun
economics is a social science
Anarfi
Economics is...... How to utilise scarce resources so that our unlimited wants are satisfied
Danish Reply
what is economics
Emmanuel Reply
economics is a science in which we can study problems related to human 's resources,need,lives, financial condition etc.
Sharma
Economic is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behavior and interactions of economic agents and how economies work.
Malaika
economics is that kind of subject which solve the economic problems like problem of scare resources center problem of an economy ( what how and from whome to produce) problem of inflation , deflation unemployment problem and other economic problems
Wani
Economics is the study of how society allocates it's scarce resources to fill their endless wants(according to Chicago school of Economics)
Omkar
Economics is the study of human action and its effects on other individuals and furthermore, society as a whole(Austrian School of Economics)
Omkar
The aggregation of the agents which interact in the form of economic activities is known as an economy
Omkar
name and explain the two rules of profit maximization
Esihle Reply
what is,elasticity
Onome Reply
Marginal utility of money remains the same. it is the assumption of
Anas Reply
Marginal utility of money remains the same. it is the assumption
Anas
Marginal utility of money remains the same. it is the assumption
Anas
marginal utility of money remains constant and as it is the worth of money , therefore it is assumed or we can say ,it is defined by the consumer himself...
mir
Marshall's demand theory
Avnish
Equilibrium of price is one at which the amount demand is exactly equal to the amount supplied explain
Mirza Reply
tell me the author or book name
Rida Reply
what is percentage method in elasticity
Ngongang Reply
Electricity – run cars are introduced and used in the country.
Princess Reply

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Source:  OpenStax, Microeconomics. OpenStax CNX. Aug 03, 2014 Download for free at http://legacy.cnx.org/content/col11627/1.10
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