Question

Haley Megan Fosnough-Biersmith goes shopping for shoes and has plenty of money with her. She will keep buying shoes until (LO2) a) her total utility equals the price b) her marginal utility equals the price c) she runs out of money d) the store runs out of shoes

Short answer

The short answer is: Haley will keep buying shoes until her marginal utility equals the price (option b). This is because a rational consumer will maximize their utility by consuming goods or services in such a way that the additional satisfaction (marginal utility) obtained from the last unit of good is equal to the price paid for it.

Step-by-step solution

Define Total Utility

Total utility is the total satisfaction or benefit a consumer receives from consuming a certain number of goods or services.

Define Marginal Utility

Marginal utility is the additional satisfaction or benefit a consumer receives from consuming one more unit of a good or service.

Understand the relationship between utility and price

A rational consumer will consume goods or services in such a way that her marginal utility from consuming the goods equals the price. In other words, she will keep consuming the goods as long as the additional satisfaction obtained from the last unit of good is greater than or equal to the price paid for it.

Evaluate the given options

Now let's evaluate each option: a) Total utility equals the price: This scenario doesn't make sense, as total utility is the sum of all utilities obtained from consuming the goods, and it cannot be equal to the price of one unit. b) Marginal utility equals the price: This scenario is correct, as it represents the condition for maximizing utility. Haley will keep buying shoes until the additional utility gained from buying one more pair of shoes equals the price of that pair. c) She runs out of money: This scenario is possible, but it doesn't ensure that Haley maximizes her utility, as she might stop buying shoes even if her marginal utility is still greater than the price. d) The store runs out of shoes: This scenario is also possible in reality, but it also doesn't ensure maximizing utility, as it is an external constraint, not based on the relationship between utility and price.

Choose the correct answer

Based on the analysis, the correct answer is: b) her marginal utility equals the price

Key concepts

Total Utility

Total utility is an essential concept in understanding consumer behavior. It represents the total satisfaction or benefit a consumer derives from consuming a set of goods or services. Imagine Haley is shopping for shoes; each pair she buys adds to her total utility.
As she continues to make purchases, her satisfaction accumulates, thus increasing her total utility value.
It's important to remember that total utility is cumulative.

• Every additional unit consumed contributes to the total utility.
• It measures the whole enjoyment rather than just a part.

No matter how many shoes Haley buys, total utility keeps adding up with each purchase. However, it's the marginal utility that tells us more about her decision to keep buying.

Price and Utility Relationship

The relationship between price and utility is critical for making sound consumer choices. In the case of Haley shopping for shoes, she faces a decision to continue or stop buying based on the comparison between marginal utility and the price of shoes.
Marginal utility is the additional satisfaction she gains from purchasing one more pair of shoes.
The rule here is simple yet powerful.

• If marginal utility is greater than the price, it's worth buying more.
• If marginal utility is less than the price, she should stop purchasing.

Understanding this relationship helps consumers like Haley to use their money wisely. They aim to achieve the highest satisfaction from the limited resources they have, ensuring each expense leads to maximum benefit.

Maximizing Utility

Maximizing utility is a fundamental concept that guides consumer behavior. For a rational consumer, the goal is to achieve the highest total satisfaction possible while spending the least amount of money.
In our example with Haley, she will continue buying shoes until the satisfaction (or marginal utility) gained from one more pair equals the price she pays for it.
At this point, she's making the best possible use of her resources.

• This point is known as the "equilibrium point."
• No further purchases would increase her overall satisfaction without paying more than they're worth.

By adhering to this principle, Haley can enjoy her shopping spree, knowing she's getting the most out of every dollar spent on shoes.