Question

To increase marginal utility, you must decrease consumption (everything else held constant). This statement is correct, even though it sounds strange. Explain why.

Short answer

Answer: Decreasing consumption can lead to an increase in marginal utility because, according to the law of diminishing marginal utility, as a consumer consumes more of a good or service, the additional satisfaction (marginal utility) from each additional unit decreases. By temporarily reducing consumption, a consumer's satisfaction from the good or service declines, which results in a higher marginal utility when consumption resumes.

Step-by-step solution

Introduce the concept of marginal utility

Marginal utility is the additional satisfaction that a consumer gains from consuming an additional unit of a good or service. It is an important concept in consumer choice theory, as it helps to explain how consumers allocate their resources to maximize their overall satisfaction (or utility).

Explain the law of diminishing marginal utility

The law of diminishing marginal utility states that as a consumer consumes more of a good or service, holding everything else constant, the additional satisfaction (marginal utility) from consuming each additional unit will eventually decrease. This law is based on the idea that consumers generally gain less satisfaction from consuming additional units of a good or service than they do from the initial units.

Illustrate the relationship between consumption and marginal utility with an example

Suppose a consumer loves eating slices of pizza. After eating the first slice of pizza, they may feel very satisfied, gaining a high level of marginal utility from it. However, as they continue to consume more slices, the additional satisfaction (marginal utility) from each subsequent slice decreases. For example, the second slice might bring less satisfaction than the first, and the fifth slice might bring even less satisfaction than the fourth. This scenario illustrates the law of diminishing marginal utility.

Explain how decreasing consumption can increase marginal utility

In this context, the statement "to increase marginal utility, you must decrease consumption" refers to the fact that if the consumer stops consuming the good or service for a while and then resumes consumption, the marginal utility of consuming the next unit might be higher than before. This is because the consumer's satisfaction from the good or service has likely decreased during the period of reduced consumption, so the next unit consumed will bring a higher level of additional satisfaction (marginal utility) than if the consumer had continued to consume at the same rate.

Conclude the explanation

To sum up, the statement is correct because, according to the law of diminishing marginal utility, consuming more of a good or service will eventually lead to lower additional satisfaction (marginal utility) from each additional unit consumed. By temporarily decreasing consumption, consumers can experience a higher marginal utility when they resume consumption, as their overall satisfaction from the good or service has decreased during the period of reduced consumption.