Question

Rational consumers will continue to consume two goods until the a. marginal utility per dollar's worth of the two goods is the same for the last dollar spent on each good. b. marginal utility is the same for each good for the last dollar spent on each good. c. prices of the two goods are equal for the last dollar spent on each good. d. prices of the two goods are unequal.

Short answer

Rational consumers will continue to consume two goods until the marginal utility per dollar's worth of the two goods is the same for the last dollar spent on each good (Option A).

Step-by-step solution

Option A. Marginal utility per dollar's worth of the two goods is the same for the last dollar spent on each good.

This option correctly represents the consumer equilibrium condition, which states that consumers will continue to consume until the marginal utility per dollar for each good is equal. This is where the consumer maximizes their utility. Therefore, this option is the correct answer.

Option B. Marginal utility is the same for each good for the last dollar spent on each good.

This option does not take into account the price of the goods. Marginal utility alone is not enough to determine the point at which a consumer will stop consuming, as different goods can have different prices. A consumer will continue to consume until the marginal utility per dollar is the same for both goods, which is not mentioned in this option. Thus, this option is not correct.

Option C. Prices of the two goods are equal for the last dollar spent on each good.

This option focuses on the prices of the goods rather than the marginal utility per dollar, which is the key factor that determines when a consumer stops consuming. Equal prices do not necessarily mean that the consumer is maximizing their utility; it is the equal marginal utility per dollar that matters. Therefore, this option is incorrect.

Option D. Prices of the two goods are unequal.

This option does not specify any condition regarding the marginal utility or the consumer equilibrium. Simply having unequal prices does not provide enough information to determine when the consumer will stop consuming. The correct condition is when the marginal utility per dollar is the same for both goods, which is not mentioned in this option. Hence, this option is incorrect. Based on the above explanation, we can conclude that the correct answer is Option A. Rational consumers will continue to consume two goods until the marginal utility per dollar's worth of the two goods is the same for the last dollar spent on each good.

Key concepts

Marginal Utility

Marginal utility is a cornerstone concept in consumer behavior, vital for understanding how consumers make decisions. It represents the additional satisfaction, or utility, a consumer gains from consuming one more unit of a good or service. Imagine you're eating slices of pizza; each slice you consume might bring you less satisfaction than the previous one, illustrating the principle of diminishing marginal utility.

As consumers aim to get the most out of their resources, they evaluate the marginal utility in comparison to the price of goods. This evaluation is crucial; it helps determine whether spending resources on additional units of a good is worth the satisfaction gained. To ensure that their resources are used efficiently, consumers seek to equalize the marginal utility per dollar spent across all goods they purchase.

Utility Maximization

Utility maximization is about finding that sweet spot where a consumer gets the most satisfaction from their purchases while staying within budget constraints. It's like playing a strategy game where you aim to get the maximum score with limited moves. In economic terms, consumers maneuver their spending to match the marginal utility per dollar spent across different goods.

To put it simply, imagine you're shopping with a fixed amount of money in your wallet. You'll compare the enjoyment per dollar you get from different items and allocate your money to maximize total happiness. This is why consumers adjust their consumption until the marginal utility per dollar spent is the same for all goods, ensuring they receive maximum pleasure from their spending. In practice, achieving this balance allows consumers to feel they've made the best possible decisions with their finances, leading to utility maximization.

Consumer Behavior

Consumer behavior delves into the why and how of consumer choices. It encompasses the psychological, social, and economic factors that influence purchasing decisions. Just as a scientist observes patterns in nature, economists and marketers study consumer behavior to predict how people will react to changes in prices, incomes, and preferences.

Understanding consumer behavior is crucial for businesses that aim to satisfy customers and for consumers who strive to make informed decisions. It guides companies on how to price goods, what products to introduce, and how to market them. For consumers, a deep awareness of their own behaviors can lead to more thoughtful spending, greater satisfaction with their purchases, and better financial health.