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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

the forces of dd and ss
Kemg Reply
how did you get 2900
mba Reply
what's equillibrium price
Begmee Reply
it is a Price at which there is no tendency for both the quantity demanded and quantity supplied to change.
Atanga
what is joint demand
Alejandro Reply
joint demand?
Isma
is when two commodities relate together
Emmanuel
it refers to the demand for two commodities that are jountly consumed or used together
Atanga
It is when commodities are used together
Addo
who is a conspicuous consumer
Atanga
what are subnormal profits in ecos
Tawe Reply
what is an ancient tiger
emmanuel Reply
The Four Asian Tigers, Four Asian Dragons or Four Little Dragons, are the economies of Hong Kong, Singapore, South Korea and Taiwan, which underwent rapid industrialization and maintained exceptionally high growth rates between the early 1960s and 1990s.
Napoleon
It is not correct.
Nelly
state ur own na mr correct
Napoleon
who told u?
Napoleon
u are correct
emmanuel
woow I never knew that
Birungi
ask
Foday
a
Foday
what is GDP
Lamin
gross domestic product
Tawe
I want to see unemployment essay
Mmonwa Reply
hello
Birungi
Inflation is defined as the rise in price of a commodity.
Nureni Reply
It is defined as the rise in price of a commodity.
Nureni
the persistent rise in the prices of goods and services. or commodities.
SULEIMAN
pls the third and fourth law of supply
Yarouh
what's GDP?
Allen
gross domestic product
Annor
GDP stands for Gross Domestic Product
Sande
yes
HlobisileM
what us maxima and minima
MiXUP Reply
Maxima s below equilibrium. Whilst minima s above. Equilibrium
Afran
Wht is demand
Afran
is the willingness and the ability of a consumer to purchase goods at a given price and at a particular point in time.
Assan
Ohhk different question? Ask
Afran
why is the demand curve downwards sloppy?
Assan
3 Reasons.. 1... diminishing marginal utility 2... substitution effect 3...income effect
Harshita
thanks
Assan
Because of the negative or inverse relationship between price and quantity demanded
Afran
what is the law of diminishing returns states?
Assan
ohk
Assan
The law states that all other things being equall as much of variable factor(labour) is employed on fixed factor(land) the marginal product rises..attain a maximum and begins to fall.
Afran
What is income elasticity of demand
Afran
what is monetary policy
Edward
Monetary policy is an attempt to influence the economy by opera ting in such monetary variables
Afran
thanks
Edward
Wlcm
Afran
Wht is disutility?
Afran
is disutility? is rightly writing?
Yhlas
is it i wanna say
Yhlas
Yes please Disutility
Afran
what is macro economics?
Oyas
the branch of economics concerned with large-scale or general economic factors, such as interest rates and national productivity.
idk
in other words it is the study of the economic as a whole
idk
What is an Economic growth
Ayumo Reply
Economic growth is the process whereby the real per capita income of an economy increases over a long period of time.
Nureni
what is the generally accepted defination of economics and by who
IDY Reply
Economics is defined by Lionel Robbins as a social science which studies human behaviour as a relationship between ends and scarce means which have alternative uses
Tba
Lionel Robbins definition is the best and acceptable definition of Economics.
MUNTARI
Importance of economic
Achike Reply
Helps in decision making
MP
I need like 5 importance
Achike
hi
Physcal
Hey
Muhammad
hellow dear.
juwel
hello
Al-ameen
Hello
MP
it helps an individual in rational decision making process
Assan
Fine and u
Buzabaryaho
how does it make individual in rational dicision making decisions
Annor
if an individual is faced with unlimited wants.
Assan
it also helps an individual in arranging their wants in order of their importance.
Assan
ohk
Annor
ok
Al-ameen
Hello guys
Radah
My name is Radah
Radah
Please what is a scale of preference used for?
Radah
it's use for arranging wants in order of their importance.
Assan
in other words when an individual is faced with unlimited wants,scale of preference would help the individual to select the most important wants.
Assan
Thanks
Radah
welcome
Assan
what is tourism
forgive Reply
Tourism is travel for pleasure or business
Yusuf
It is the commercial organization and operation of holidays and visits to places of interest.
Nureni
who is a price taker?
sam Reply
A price taker is a person or a company who have no control to dictate a prices of a goods or services
Unique
Someone who sets price
Nureni
In the trading world, a price taker is a trader who does not affect the price of the stock if he or she buys or sells shares.
Nureni
A price taker refers to a firm or an individual who sets the price of his good and services based on an external factor. In other words he cannot choose and set a price by himself. An example is a firm operating in perfect competition where prices are set through the price mechanism.
Tba
in a common and suitable sense state the law of diminishing returns
Unique Reply
The higher the satisfaction derived from a particular commodity,the lower the demand for it but that law doesn't match in some instances.
Nureni
state the features of an imperfect competitive market
Naomi
@NURENI instance like wat
Unique
imperfect competitive market involves large number of sellers and buyers price makers selling cost product differentiation free entry and exit of a firms
Unique

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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