Question

WWhich statement is the most accurate? (LO3) a) Your utility schedule for chewing gum can never change, since it is based on your demand schedule for chewing gum. b) Interpersonal utility comparisons cannot be made unless people buy that good at the same price. c) Everyone gets the same utility from taking a biology course. d) A good or service does not have any inherent utility, so we cannot say that a day at a beauty spa is worth $\mathrm{\$}250$.

Short answer

(d) A good or service does not have any inherent utility, so we cannot say that a day at a beauty spa is worth $\mathrm{\$}250$.

Step-by-step solution

Analyze Statement A

Statement a) says that your utility schedule for chewing gum can never change, since it is based on your demand schedule for chewing gum. However, a utility schedule can change with factors such as personal preferences and changes in income. Therefore, this statement is not accurate.

Analyze Statement B

Statement b) claims that interpersonal utility comparisons cannot be made unless people buy that good at the same price. While having the same price can ease comparisons, it is not an essential condition for comparing utilities. Utilities can still be compared based on preferences and the value assigned to a good by each individual. So, this statement is not accurate, either.

Analyze Statement C

Statement c) says that everyone gets the same utility from taking a biology course. This statement is not accurate since utility is subjective, and different individuals can derive different levels of satisfaction from the same good or service. Some students may love biology, while others may not find it interesting at all.

Analyze Statement D

Finally, statement d) mentions that a good or service does not have any inherent utility, so we cannot say that a day at a beauty spa is worth $\mathrm{\$}250$. It is true that utility is subjective and depends on the individual's preferences and needs. A beauty spa day valued at $\mathrm{\$}250$ might provide a high level of utility to someone who values self-care and relaxation, but it might not be worth the price for someone else. Based on this analysis, statement d) seems to be the most accurate compared to the other options. Answer: (d) A good or service does not have any inherent utility, so we cannot say that a day at a beauty spa is worth $\mathrm{\$}250$.

Key concepts

Subjective Utility

When we talk about subjective utility in economics, we refer to the personal level of satisfaction or benefit that an individual derives from consuming a product or service. This utility is inherently personal and varies from person to person based on their preferences, tastes, and needs. For example, one person might receive immense satisfaction from attending a live concert, valuing the experience much higher than the ticket's monetary cost, while another individual might not enjoy the loud environment and thus perceive the utility of the concert as low.

Unlike objective measurements that can be quantified or compared across the board, subjective utility is based on the individual's internal assessment of worth or happiness gained from a good or service. This makes it complex to measure, as it cannot be objectively evaluated but is rather assessed based on the individual's feelings and expressed preferences.

Impact of Subjective Utility on Choices

Subjective utility plays a significant role in decision-making processes. It explains why consumers make different choices despite having similar options available. This concept supports the notion that there's no one-size-fits-all answer to questions of value and satisfaction in economic transactions.

Utility Schedule

A utility schedule is a table that shows the relationship between the consumption of a good or service and the amount of utility derived from it. Essentially, it is a way to represent how each additional unit of a product or service consumed contributes to an individual's overall utility. As consumers, we often experience diminishing marginal utility, meaning that the utility or satisfaction we get from consuming one more unit of something tends to decrease with each additional unit consumed.

For instance, the first slice of pizza might give immense pleasure, but by the fourth or fifth slice, the additional satisfaction received from eating more pizza diminishes. This is reflected in the utility schedule, where each successive slice adds increasingly less utility compared to the previous one.

The Fluid Nature of Utility Schedules

Utility schedules are not static; they change as our circumstances, preferences, and incomes change. Hence, contrary to the fixed nature implied in the exercise's statement A, if a person's preference for chewing gum changes, possibly due to a change in taste or health consideration, their utility schedule for chewing gum will also change.

Interpersonal Utility Comparisons

Interpersonal utility comparisons involve comparing the level of satisfaction or preferences of one individual relative to another. These comparisons are inherently problematic because utility is subjective. The idea that we could objectively compare the happiness or satisfaction of different people is not supported by economic theory, as it would require a standard unit of measurement for utility which does not exist.

While statement B from the exercise suggests that a common price might allow for such comparisons, it oversimplifies the complexity of human satisfaction and ignores the subjective nature of utility. Two people may pay the same price for a concert ticket, yet one might have a transformative experience while the other merely finds it pleasant.

Why Economists Avoid These Comparisons

Due to the problems in measuring and comparing individual utilities, economists typically avoid making interpersonal utility comparisons and focus instead on individual preference satisfaction without claiming that one person's utility could be equated or compared to another's.

Economic Preferences

Economic preferences refer to the choices that individuals make based on their likes, dislikes, priorities, and willingness to trade off one option for another. These preferences are crucial for understanding consumer behavior and are a foundation for the concept of utility in economics. They help explain why different individuals make different decisions when faced with the same set of options.

Preferences can be influenced by a variety of factors, including cultural background, personal experiences, and the information available to individuals. Moreover, they are often revealed through the choices individuals make: choosing a bicycle over a car for daily commutes reveals a preference for cost-saving and perhaps environmental concern.

Preferences and Economic Theory

In economic theory, preferences are used to model how individuals decide to allocate their limited resources among various goods and services with the goal of maximizing their utility. Changes in preferences can lead to changes in demand and thereby influence market dynamics and pricing.