Question

A new study by economists Justin Wolfers and Betsey Stevenson has cast doubt on the credibility of the Easterlin paradox, which claims that higher incomes do not necessarily make people happier. The new study states that people do report more happiness and satisfaction as they grow richer. Moving from rich to richer seems to raise happiness just as much as moving from poor to less poor. Source: The Economist, May 2,2013 According to the news clip: a. How does moving from rich to richer influence total utility? b. How do total utility and marginal utility from consumption change over time?

Short answer

a. Total utility increases as one moves from rich to richer. b. Total utility continues to rise over time, but marginal utility from consumption may decline.

Step-by-step solution

Understanding the Study

Read the study's key findings which state that people report more happiness and satisfaction as they grow richer. Also, note that moving from rich to richer has a positive impact on happiness just as moving from poor to less poor.

Determine the Influence on Total Utility

Total utility increases as income increases according to the study.

Analyze Total Utility Over Time

Total utility will continue to grow over time as income grows because people report increased happiness with higher incomes.

Evaluate Marginal Utility

Even though total utility increases, marginal utility from consumption might decrease over time. This is because the additional satisfaction (happiness) a person gets from one extra unit of consumption tends to decline as they consume more.

Key concepts

Total Utility

Total utility is the overall level of satisfaction or happiness that a person derives from consuming goods and services. Imagine it like a general 'happiness meter' that increases as you consume more stuff.
According to the study by Justin Wolfers and Betsey Stevenson, as people become richer, they report higher levels of total utility. This suggests that their overall happiness or satisfaction rises with increased income.
If you think about it practically: buying a new house, a car, or going on vacation can add layers of happiness to a person’s life, thus increasing their total utility. It’s not just how much you have, but how much these resources contribute to your overall sense of well-being.
In the context of the Easterlin paradox, this study contradicts the old belief that beyond a certain point, more income doesn't lead to more happiness. Here, growing from rich to richer still adds to the total happiness meter.

Marginal Utility

Marginal utility refers to the additional satisfaction or happiness you get from consuming one more unit of a good or service. Think of it as the 'extra' happiness you feel when you buy that next cup of coffee or the next pair of shoes.
Over time, even though your total utility increases with more consumption, the marginal utility often decreases. This means each additional item you consume brings less 'extra' happiness than the previous one.
For example, the first slice of pizza might be incredibly satisfying, but the fifth or sixth slice? Not so much.
In the study, this concept helps us understand that while people may get happier as they get richer (increasing total utility), the extra happiness from each additional dollar earned (marginal utility) might start to diminish.

Income and Happiness

Income and happiness have an interesting relationship. Earlier, the Easterlin paradox suggested that after a certain point, an increase in income doesn’t significantly boost happiness.
However, the new study by Wolfers and Stevenson provides a different view. It finds that people do report greater happiness as their income rises, not just from poor to less poor, but also from rich to richer.
This highlights that money can indeed buy happiness, but it may not be linear for everyone.
For instance, additional income might allow for better healthcare, educational opportunities, and leisure activities, increasing one's overall life satisfaction. Nonetheless, the diminishing marginal utility means that while every extra dollar adds happiness, it does so at a decreasing rate.

Economic Study

Economic studies often explore the relationship between various factors like income, consumption, and happiness. These studies use data and statistical analysis to understand human behavior and draw conclusions that can influence policy and personal decisions.
Wolfers and Stevenson's study revisits the Easterlin paradox using modern data and methodologies, questioning the belief that after a certain point, more money doesn't lead to more happiness.
Such studies are crucial because they help us understand not only economic behaviors but also the psychological impacts of financial changes.
This specific study aids policymakers and economists in crafting strategies to boost well-being, ensuring that economic growth translates into real-life happiness and satisfaction.