Question

A certain consumer buys only food and compact discs. If the quantity of food bought increases, while that of compact discs remains the same, the marginal utility of food will a. fall relative to the marginal utility of compact discs. b. rise relative to the marginal utility of compact discs. c. rise, but not as fast as the marginal utility of compact discs rises. d. fall, but not as fast as the marginal utility of compact discs falls.

Short answer

The marginal utility of food will fall relative to the marginal utility of compact discs. \(Answer: a. \)

Step-by-step solution

Understand the options

Given the 4 possible options: a. fall relative to the marginal utility of compact discs. b. rise relative to the marginal utility of compact discs. c. rise, but not as fast as the marginal utility of compact discs rises. d. fall, but not as fast as the marginal utility of compact discs falls. We have to determine how the marginal utility of food will change relative to the marginal utility of compact discs if the quantity of food bought increases and the number of compact discs remains the same.

Understanding the law of diminishing marginal utility

The law of diminishing marginal utility states that as the amount of a good consumed increases, the marginal utility of that good decreases. In simpler words, the more of a good we consume, the less satisfaction we gain from each additional unit. This law can be applied to the consumption of food in this exercise.

Applying the law of diminishing marginal utility

As the quantity of food bought increases, according to the law of diminishing marginal utility, the marginal utility of food decreases. However, since the quantity of compact discs remains the same, the marginal utility of compact discs will not change.

Comparing the marginal utilities

Since the marginal utility of food decreases and the marginal utility of compact discs stays the same, we can now determine how the marginal utility of food will change relative to the marginal utility of compact discs. Based on our analysis, the correct answer is: a. The marginal utility of food will fall relative to the marginal utility of compact discs.

Key concepts

Law of Diminishing Marginal Utility

Imagine you are at a buffet, and with each additional plate of food, your feeling of satisfaction decreases. This scenario illustrates the law of diminishing marginal utility, a crucial concept in economics that describes how the extra benefit or pleasure (marginal utility) a person receives from consuming one more unit of a good or service decreases as the quantity consumed increases.

Take, for instance, our scenario with food and compact discs. As a consumer enjoys more food, each extra bite offers less enjoyment than the previous one. However, this doesn't happen because the food's quality has changed; instead, the satisfaction derived from consumption wanes as a natural response to having more of it. This explains the phenomenon observed where after consuming to a certain point, people are willing to trade off additional food for something else they have less of, such as compact discs in this case.

The concept is rooted in the principle that humans have a limited capacity for enjoyment at a given time. The law is graphically represented by a downward-sloping curve when plotting marginal utility against quantity. As a consequence, this principle informs a broad spectrum of economic behavior, including pricing, budgeting, and consumer choice theory, emphasizing its foundational role in microeconomics.

Consumer Choice Theory

Now, let's dive into consumer choice theory which intricately connects to the law of diminishing marginal utility. This theory is part of microeconomic model that attempts to relate preferences to consumer demand curves. The core concept here is that consumers face trade-offs and must allocate their limited resources to maximize their satisfaction.

In the case of our consumer choosing between food and compact discs, the theory suggests that an individual will distribute their spending across these two goods to achieve the highest level of overall satisfaction. Here's the catch: as our consumer buys more food (assuming the utility of compact discs is constant), the satisfaction from each additional food item lessens, prompting a shift in preference towards compact discs over time. This shift is an outcome of maximizing utility, a central premise in consumer choice theory.

Ultimately, the theory provides a framework for understanding how income, prices, and personal preferences influence consumption patterns. It also addresses how and why a consumer's demand curve for goods and services might change, a phenomenon predicted by the law of diminishing marginal utility. Utilizing various tools like indifference curves and budget constraints, the theory paints a comprehensive picture of consumer behavior.

Economic Consumption

Finally, to bring it all together, let's talk about economic consumption. This term refers to the use of goods and services by households. Consumption is the endpoint of the economic process, and it's influenced by both the law of diminishing marginal utility and consumer choice theory.

Economic consumption isn't just about buying products; it's about the choices and satisfaction associated with those purchases. In our exercise, the consumption of food versus compact discs demonstrates the direct relationship between consumption decisions and consumer satisfaction. While more food is consumed, the utility derived from each extra unit declines, leading to a potential shift in spending toward compact discs once they offer more relative satisfaction.

Furthermore, economic consumption is a driving force behind the overall economy. It accounts for a major portion of GDP in most countries, reflecting the importance of household spending in maintaining economic health. Additionally, understanding consumption allows economists to predict market tendencies, interpret fiscal policies, and design business strategies that cater to consumer needs and behaviors. In essence, economic consumption is a manifestation of the choices made following the law of diminishing marginal utility, captured through the lens of consumer choice theory.