Question

As people age, they typically spend more on luxury goods than when they are younger. Does this mean that diminishing marginal utility of money declines as people age?

Short answer

Answer: No, it cannot be concluded that the diminishing marginal utility of money declines as people age just because people spend more on luxury goods as they get older. The consumption of luxury goods reflects a change in preferences and lifestyle, which does not necessarily indicate a change in the marginal utility of money.

Step-by-step solution

Understand the concept of diminishing marginal utility

Diminishing marginal utility is an economic principle stating that as a person consumes more of a good or service, the additional satisfaction (utility) they receive from each additional unit of the good or service decreases. In the context of money, diminishing marginal utility means that each extra dollar of income brings less utility compared to the previous dollar earned.

Consider the spending habits of older people

It is given that as people age, they typically spend more on luxury goods than when they are younger. Luxury goods are items that are not essential for survival but improve one's quality of life. The increased spending on luxury goods could be due to various reasons, such as having accumulated wealth, having fewer financial responsibilities, or having higher disposable income.

Analyze the relationship between diminishing marginal utility and age

If the diminishing marginal utility of money declines as people age, this would imply that each additional dollar earned becomes more important to them, despite spending more on luxury goods. But, in this context, it is essential to note that increased consumption of luxury goods does not directly indicate the diminishing marginal utility of money. Instead, it reflects people's preferences and, therefore, their willingness to spend money on luxury items.

Evaluate the statement

Based on the analysis in the previous steps, it cannot be concluded that diminishing marginal utility of money declines with age, just because people spend more on luxury goods as they get older. The consumption of luxury goods reflects a change in preferences and lifestyle, which does not necessarily indicate a change in the marginal utility of money. In conclusion, while aging may be associated with a greater willingness to spend on luxury goods, it does not imply that the diminishing marginal utility of money declines as people age.