Question

Use your understanding of utility to explain whether money buys happiness. List two important factors in your explanation.

Answer 1

Till now in microeconomics utility is defined to be cardinal utility it is quantifiable. But the above question asks 'whether money buys happiness' which cannot be quantified. It may vary from person to person.

But in terms of economic achievement, an increase in income will lead to more resources and hence greater utility from it. But it has been observed that as GDP incomes people are happy but after a point it is constant (easterlin paradox).

Also, relative income plays an important role in deriving your utility from the money. For example you are offered to jobs, in company A you get $1000 but the avg. is $2000 and in company B you are offered $700 and avg. is $350. You might tend to choose company B although it is paying less than company A.