Question

2. Why is it that the consumer can maximize total net utility only if the purchase quantity brings marginal utility as close as possible to equality with price?

3. Explain what happens to the magnitude of price elasticity of demand as price increases along a straight-line demand curve.

Answer 1

Answer - It is always assumed that the consumer is rational consumer. This means that , the consumer has to gain the utility which is equal to the price spent. He wants to get the maximum advantage from the every penny that he spends on consumption. Hence , the consumer needs to maximise his utility with the price he pays. If the price is greater than marginal utility , this means that the consumer is in loss with respect to utility. Hence , the consumer always prefers the consumption in which he gains maximum utility or atleast the price should be equal to marginal utility.

Answer 2 - If the price of the good increases , this will be shown as the movement in the upward direction along the straight line demand curve. As the price increases , and price moves in upward direction , the elastic keeps on increasing because with the increase in price , the demand keeps on decreasing. Hence the elasticity keeps on increasing as price increases.