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Marginal Utility & utility of money

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9/10/2015 8:40:42 AM
Posted: 2 years ago
Hello everyone,

I apologize if I missed the concept of the forum, but I'm studying hard for ma eco test and there is one point in marginal utility that really bugs me.

There is question that has part with marginal utility of money, I'm gonna write it down so maybe someone knows how to solve it.

The table shows the total utility that one individual derives from consuming different quant. of a good.

Quantity(units) Total Utility(units)
1 20
2 36
3 50
4 62
5 72
6 80

(bold numbers should be under TU)

The individual's marginal utility of money is $1=2 units of utility.

What's the maximum quantity of the good that individual will buy when its price is 6$?

I know how to do MU, then MU/price to compare rise and fall....but this I don't understand. Any help would be greatly appreciated.

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9/11/2015 7:10:25 PM
Posted: 2 years ago
Hey, something that my very basic and limited understanding of economics can actually help with!

The price of the good is $6 per unit. Since an individual dollar has a utility of 2 (as well as a marginal utility of 2 for each successive dollar), this means that, effectively, the marginal cost of each unit of the good is 2 utility/dollar times 6 dollars per unit = 12. The consumer gives up $6, which has a constant marginal utility of 12, to buy each good; thus the marginal cost of each good is 12.

The consumer will only benefit from buying the good up to the point where the marginal utility of buying a unit of an item equals the marginal cost of purchasing it, so he will only buy up to the point where the marginal utility is 12 (where he would be equally well off whether he's saving his money that's worth 12 utility, or buying a 12 utility good in exchange for that money). In this case, he would only buy up to 4 units, since the fourth unit has an MC and an MU of 12.

Apologies for the verbosity (it's been a while since I've done this), but I hope it helps.

An alternative way to think of it is to reduce the marginal utility to MU/$. The first unit costs $6, and has an MU of 20. The MU/$ of the first unit is 20/$6 = 10/3. The MU/$ of the fourth unit is 12/$6 = 2, which also is the MC of giving up a single dollar (one dollar has an MU of 2). The MU/$ of the fifth unit is 10/$6 = 5/3, which is less than the marginal cost/$ of two; thus the consumer would not buy the fifth unit.
Bailey <3

"For often evil men are rich, and good men poor;
But we will not exchange with them
Our virtue for their wealth, since one abides always,
While riches change their owners every day." - Solon, Plutarch's "Life of Solon"