Question

An additional unit of Old Product X will bring Cindy an MU of 15 utils, an additional unit of New Product Y will bring Cindy an MU of 30 utils, and an additional unit of New Product Z will bring Cindy an MU of 40 utils. If a unit of Old Product X costs \(10, a unit of New Product Y costs \)30, and a unit of New Product Z costs $20, which product will Cindy prefer to spend her money on? a. Old Product X. b. New Product Y. c. New Product Z. d. More information is required.

Short answer

Cindy would prefer to spend her money on New Product Z.

Step-by-step solution

Understand the concept of Marginal Utility per Dollar

The marginal utility per dollar is a way to measure the amount of utility (satisfaction) gained from spending each dollar on a good. It helps in comparing which good gives the most satisfaction for the money spent.

Calculate Marginal Utility per Dollar for Old Product X

For Old Product X, the marginal utility (MU) is 15 utils and the cost is $10. So, the marginal utility per dollar is calculated as:\[ \text{MU per Dollar for X} = \frac{MU}{\text{Cost}} = \frac{15}{10} = 1.5 \]

Calculate Marginal Utility per Dollar for New Product Y

For New Product Y, the MU is 30 utils and the cost is $30. The marginal utility per dollar is calculated as:\[ \text{MU per Dollar for Y} = \frac{MU}{\text{Cost}} = \frac{30}{30} = 1 \]

Calculate Marginal Utility per Dollar for New Product Z

For New Product Z, the MU is 40 utils and the cost is $20. The marginal utility per dollar is calculated as:\[ \text{MU per Dollar for Z} = \frac{MU}{\text{Cost}} = \frac{40}{20} = 2 \]

Compare Marginal Utility per Dollar for all products

Compare the marginal utility per dollar for each product: \(1.5\) for Product X, \(1\) for Product Y, and \(2\) for Product Z. The highest marginal utility per dollar is Product Z with \(2\).

Key concepts

Consumer Choice

Consumers make choices based on multiple factors, including personal preferences, budget constraints, and the available options in the market. Every choice involves weighing the costs against the benefits. The concept of consumer choice is pivotal in economics because it dictates how resources are allocated through buying decisions.

When faced with multiple options, consumers tend to pick the option that provides the highest utility, which is another term for satisfaction or benefit, from their purchase. In the exercise presented, Cindy is choosing between three products, each with different levels of satisfaction and cost associated. The idea is to select the product that offers the most utility for each dollar spent, a process which can be analyzed using the concept of Marginal Utility per Dollar.

• Understanding choices helps to determine which product to buy.
• Consumer choice is driven by a comparison of marginal utilities and prices.
• Making an informed choice allows for maximizing satisfaction given a budget constraint.

Utility Maximization

Utility maximization refers to the strategy consumers use to get the most out of their spending. The goal is to derive the greatest possible satisfaction, or utility, from their available income.

The principle behind utility maximization is simple: allocate resources in such a way that the marginal utility per dollar spent is equalized across all options available. In other words, a consumer should spend their money on the products that offer the most utility per dollar until all their money is spent or all products offer the same utility per dollar.

In our exercise, we see that Cindy will optimize her purchase by choosing the product with the highest marginal utility per dollar. This ensures that every dollar she spends gives her the best possible return in terms of satisfaction.

• To maximize utility, compare marginal utilities across products.
• Spend money where it yields the highest satisfaction per dollar.
• Utility maximization involves equalizing the marginal utility per dollar for all purchases.

Marginal Analysis

Marginal analysis is a crucial economic concept used to assess the benefits and costs of consuming additional units of a good or service. It involves evaluating the added satisfaction gained versus the additional cost incurred.

This concept helps consumers like Cindy in making decisions by calculating the marginal utility, which is the added satisfaction from consuming one more unit of a good. The marginal utility per dollar metric is particularly useful because it takes into account both the utility obtained and the price paid.

In Cindy's example, she calculates the marginal utility per dollar for each product to determine the best option. By comparing these values, she identifies Product Z as the most favorable choice since it yields the highest satisfaction per dollar spent. This use of marginal analysis aids in achieving the most effective allocation of resources.

• Marginal analysis helps in making informed economic decisions.
• It balances additional benefits and costs for decision-making.
• Consumers use it to compare marginal utility per dollar across different goods.