Question

If the marginal utility you derived from the last video game you played was \(\$ 1.75\) and the game cost \(\$ 0.50\) to play, \((\mathrm{LO1}, 2)\) a) you have been playing the game too long b) you haven't been playing the game long enough c) there is no way to determine whether you have played the game long enough

Short answer

Since the marginal utility of \(\$1.75\) is greater than the cost of \(\$0.50\), the student hasn't been playing the game long enough because the satisfaction they get from playing the game is greater than the cost involved. The correct answer is b) you haven't been playing the game long enough.

Step-by-step solution

Understanding Marginal Utility and Cost

Marginal Utility (MU) is the additional satisfaction derived from consuming an additional unit of a certain product, in this case, the video game. The cost of playing the game is given in monetary terms, representing the price to play an additional round of the game.

Comparing Marginal Utility and Cost

To determine whether the student has been playing the game too long or not long enough, we need to compare the marginal utility they get from playing the game with the cost required to play it. If the marginal utility is greater than the cost, it means they should keep playing because the additional satisfaction is worth more than what they are paying. On the other hand, if the marginal utility is less than the cost, then they should stop playing because the additional satisfaction isn't worth the price.

Evaluating the Answer Choices

In our case, the marginal utility of playing one additional round is \(\$1.75\), and the cost of playing one additional round is \(\$0.50\). Since \(1.75 > 0.50\), the student hasn't played the game long enough because the satisfaction they get from playing the game is greater than the cost involved. So, the correct answer choice is: b) you haven't been playing the game long enough

Key concepts

Marginal Utility vs Cost

Understanding the interaction between marginal utility and cost is essential for making informed consumption choices. Marginal utility refers to the additional satisfaction or pleasure you gain when you consume one more unit of a product or service. This concept is critical when consumers have to decide whether or not to consume an extra unit of a good.

For example, if the satisfaction (measured in monetary value) from playing one more video game is \(1.75, but the actual money you spend to play that game is only \)0.50, you are gaining more satisfaction than it costs you to play; hence, you are in a favorable situation. This relationship suggests a simple rule of consumption: continue consuming as long as the marginal utility exceeds the marginal cost. It's only when these numbers start to reverse—when the cost begins to outweigh the utility—that you'd consider stopping.

In practical terms, this could be utilized by businesses in pricing strategies, ensuring prices are set to balance consumer's perceived value with the cost, maximizing profit without deterring the consumers due to high prices.

Consumer Satisfaction

The cornerstone of any economic transaction from a consumer's standpoint is the principle of satisfaction, often termed in economics as 'utility.' In our everyday lives, this concept is implicit in nearly every choice we make, whether it's about what to eat, what to watch, or what games to play.

Consumer satisfaction hinges on the comparison between the expected pleasure or utility from a good with its associated cost. When we derive a high level of utility from a product that costs us relatively less to consume, our overall consumer satisfaction increases. This is because we perceive that we have received a good deal, getting more 'bang for our buck.' In the example of the video game, the player's satisfaction would be deemed high because the cost of playing does not come close to the utility they experience by further engaging in the game.

Factors Influencing Satisfaction

• Quality of the good or service
• Individual preferences and tastes
• Prior experiences and expectations
• Alternative options available

Consumer satisfaction isn't static; it can change over time with repeated consumption due to the concept of diminishing marginal utility, where each additional game played might bring less joy than the previous one.

Optimal Consumption Decision

An optimal consumption decision is the goal of every consumer, which involves obtaining the most satisfaction or utility from their purchases given the constraint of their budget. This decision-making process can be quite complex, as it takes into account not just the utility and cost of an extra unit of a good, but also the consumer's income and the other goods and services available.

The key to an optimal decision lies in balancing the scales of marginal utility and cost. If a player squeezes out more joy from the game compared to what it costs them, say \(1.75 of utility for a \)0.50 cost, they should continue playing. However, once the marginal utility aligns with or is less than the marginal cost, that is the time to stop and perhaps spend resources on other activities or goods that might yield higher satisfaction.

Considering Budget Constraints

When making optimal consumption decisions, individuals must also weigh their total available budget. It's not just about the marginal trade-off; consumers must also avoid overspending on any one good to the detriment of their overall ability to purchase a variety of goods and services necessary for their well-being.

The wise consumer, therefore, strives to achieve a balance where the last dollar spent across all goods provides equal marginal utility, ensuring the most efficient use of their budget.