Question

A state of consumer equilibrium for goods consumed prevails when the a. marginal utility of all goods is the same for the last dollar spent for each good. b. marginal utility per dollar's worth of two goods is the same for the last dollar spent for each good. c. price of two goods is the same for the last dollar spent for each good. d. marginal cost per dollar spent on two goods is the same for the last dollar spent for each good.

Short answer

A state of consumer equilibrium for goods consumed prevails when the marginal utility per dollar's worth of two goods is the same for the last dollar spent for each good. This is expressed mathematically as \( \frac{MU_{1}}{P_{1}} = \frac{MU_{2}}{P_{2}} \), where \(MU_{i}\) is the marginal utility of good i, and \(P_{i}\) is the price of good i. The correct answer is option b.

Step-by-step solution

Option A: Marginal Utility of All Goods is the Same

This statement is not accurate, as in consumer equilibrium, it's not the marginal utility of all goods that should be the same, but rather the marginal utility per dollar spent on each good.

Option B: Marginal Utility per Dollar's Worth of Two Goods is the Same

This statement is correct. In consumer equilibrium, a consumer allocates their budget in such a way that the marginal utility per dollar spent on each good is equal. Mathematically, it can be expressed as: \( \frac{MU_{1}}{P_{1}} = \frac{MU_{2}}{P_{2}} \) where \(MU_{i}\) is the marginal utility of good i, and \(P_{i}\) is the price of good i.

Option C: Price of Two Goods is the Same

This statement is not accurate, as consumer equilibrium doesn't require the prices of the two goods to be the same. Instead, it requires the marginal utility per dollar spent on each good to be equal.

Option D: Marginal Cost per Dollar Spent on Two Goods is the Same

This statement is not accurate, as consumer equilibrium is concerned with the marginal utility per dollar spent on each good, not the marginal cost per dollar spent. As a result, the correct statement regarding consumer equilibrium for goods consumed is: b. Marginal utility per dollar's worth of two goods is the same for the last dollar spent for each good.

Key concepts

Marginal Utility

Marginal utility is a crucial concept in understanding consumer behavior. It refers to the additional satisfaction or benefit a consumer receives from consuming one more unit of a good or service. Imagine you're eating slices of pizza. The first slice might give you immense joy, but as you consume more, the additional satisfaction you gain from each new slice tends to decrease. This illustrates the concept of diminishing marginal utility.
This principle is vital because it explains why consumers make choices about what to consume and how much to consume of each good. At some point, the satisfaction from consuming additional units won't be worth the cost or effort, leading consumers to adjust their consumption patterns to maximize their overall happiness.

Budget Allocation

Budget allocation is the process by which consumers decide how to distribute their financial resources among various goods and services. With a limited budget, every consumer aims to achieve the best possible satisfaction. This requires making choices about what to buy and how much of it to buy.
When making these decisions, consumers consider the prices of goods and their individual preferences. They then allocate their budget in a way that allows them to gain the highest overall utility. This means spending money on those combinations of goods that provide the greatest overall satisfaction, given their budget constraints. Mathematical tools and economic theories, like the concept of consumer equilibrium, help in understanding and predicting these decisions.

• Consider personal priorities and needs.
• Understand the trade-off between different goods.

Marginal Utility Per Dollar

Marginal utility per dollar is a key principle in achieving consumer equilibrium. This concept involves comparing the marginal utility gained per dollar spent across different goods or services. To determine the best allocation of spending, a consumer evaluates the utility derived from every dollar spent on different items.
For instance, if you're choosing between buying apples or oranges, you'd consider not just their prices, but also the satisfaction (or utility) each additional apple or orange provides. You'd aim to spend your budget proportionally to maximize utility per dollar spent on each fruit.
In practical terms, consumer equilibrium is achieved when the marginal utility per dollar is equalized across all goods, following this formula:
\( \frac{MU_{1}}{P_{1}} = \frac{MU_{2}}{P_{2}} \)
Here, \(MU_{i}\) is the marginal utility, and \(P_{i}\) is the price of the good. This balance ensures that every dollar spent contributes equally to overall satisfaction.