Question

Five Signs You Have Too Much Money When a bottle of water costs \(\$ 38,\) it's hard not to agree that bottled water is a fool's drink. The drink of choice among image-conscious status seekers and high-end tee-totalers in L.A. is Bling \(\mathrm{H}_{2} \mathrm{O} .\) It's not the water that accounts for the cost of the \(\$ 38,\) but the "limited edition" bottle decked out in Swarovski crystals. a. Assuming that the price of a bottle of Bling \(\mathrm{H}_{2} \mathrm{O}\) is \(\$ 38\) in all the major U.S. cities, what might its popularity in Los Angeles reveal about consumers' incomes or preferences in Los Angeles relative to other major U.S. cities? b. Why might the marginal utility from a bottle of Bling \(\mathrm{H}_{2} \mathrm{O}\) decrease more rapidly than the marginal utility from ordinary bottled water?

Short answer

Bling H2O's popularity in L.A. suggests higher incomes and value placed on status; its marginal utility drops quickly due to rapid novelty loss.

Step-by-step solution

Understand the Price

The exercise tells us that the price of a bottle of Bling H2O is $38, significantly higher than typical bottled water. Recognize that the high price is due to the 'limited edition' bottle decorated in Swarovski crystals, not the water itself.

Analyzing Consumer Preferences and Incomes (Part a)

Given that Bling H2O is popular in Los Angeles, consider what this reveals about the consumers in L.A. compared to other U.S. cities:

Step 2.1: Higher Disposable Income

Consumers in Los Angeles may have higher disposable incomes, allowing them to spend more on luxury items like Bling H2O.

Step 2.2: Preference for Status Symbols

The popularity of Bling H2O suggests that consumers in L.A. may prioritize status and image, willing to invest in high-end, luxury items.

Understanding Marginal Utility (Part b)

Marginal utility refers to the additional satisfaction gained from consuming one more unit of a good. With Bling H2O, consider why its marginal utility might decrease more quickly compared to ordinary bottled water.

Step 3.1: Novelty Effect

Bling H2O's initial appeal lies in its novelty and luxury. Once consumers satisfy their curiosity, each additional bottle provides less new excitement.

Step 3.2: Diminishing Returns of Luxury

The very high price and the luxury aspect might mean that the 'thrill' wears off quickly, causing the marginal utility to drop faster.

Step 3.3: Practical Use vs. Image

While ordinary bottled water satisfies basic hydration needs, Bling H2O mainly serves as an image booster. Thus, the practical utility is limited after the initial purchase.

Key concepts

Disposable Income

Disposable income is the net amount of money a household has after paying all necessary taxes. This amount can be spent on a variety of goods and services.

For example, if individuals in Los Angeles have higher disposable incomes, they are likely to splurge on luxury items, such as expensive bottled water like Bling H2O.

High disposable income often leads to increased spending on non-essential goods, which could explain why there is a significant market for high-end products in certain areas.

• More money for luxury items
• Explains regional spending behaviors

When discussing disposable income, it's essential to recognize its impact on consumer choices and overall market demand.
People with higher disposable incomes are more likely to buy items that serve as status symbols or satisfy exclusive tastes.

Marginal Utility

Marginal utility refers to the additional satisfaction or benefit gained from consuming one more unit of a good or service.

Generally, the first unit of a good consumed will provide the highest level of satisfaction, and each subsequent unit typically offers less additional satisfaction.

In the case of Bling H2O, its initial appeal is tied to its luxury and uniqueness. This is often referred to as the 'novelty effect,' making the first purchase highly satisfying.

• Initial excitement is high
• Subsequent purchases less satisfying

As consumers purchase more bottles, the marginal utility decreases. This is because the novelty wears off, and the practical utility remains unchanged.
For example, the first bottle is exciting due to its unique packaging, but by the third or fourth bottle, the thrill fades, reducing the additional satisfaction gained.

Status Symbols

Status symbols are items or commodities that signify an individual's social status or wealth.

The use of Bling H2O as a status symbol indicates that consumers in Los Angeles might place high value on their social image and perception among peers.

Owning luxury items suggests wealth and high social status.

• Indicates social image
• Luxury as a representation of wealth

These consumers are willing to pay a premium for items that distinguish them from others. The Swarovski crystal-decorated bottle of Bling H2O perfectly serves this purpose.

In essence, people use status symbols to communicate their economic standing and to gain social acceptance or admiration. This behavior is especially prevalent in affluent communities or areas renowned for their luxury lifestyle, such as Los Angeles.

Consumer Preferences

Consumer preferences reflect the tastes, choices, and inclinations of buyers when selecting goods and services. They are influenced by various factors, including income, cultural backgrounds, and individual desires.

In Los Angeles, for example, consumer preferences might lean heavily towards luxury and unique items like Bling H2O.

People tend to buy products that match their personal tastes and societal norms.

• Reflects individual tastes
• Influenced by culture and income

In the case of Bling H2O, consumers may prioritize products that offer a sense of exclusivity and status. The high price and decorative bottle cater to specific preferences for luxury and image.
Understanding consumer preferences helps companies tailor their products to suit the needs and wants of their target audience. This is why high-end products often thrive in affluent markets where consumers place importance on unique, prestigious items.