Question

1.) Why is it that the more we do something, the better we get it but we also receive diminishing returns? How can these two things happen? Is there a conflict?

2.) Why do consumers make a choice by looking at both the Marginal Utility (MU) and the price for a product (MU/P) rather than just the price or just the marginal utility? Explain

Answer 1

1) No there is no conflict . The more we do something the better we get at it , this phenomenon is called specialization or learning by doing .

Diminishing returns occurs due to other factors . In a production process there are other factors of production involved by machinary or capital good . So at some point when there are too many workers working on a single machine it leads to over crowding and hence causes diminishing returns . An additional workers cannot perform well on the same machine that is being used by so many other workers and hence marginal output falls .

2) They do this because of the law of marginal utility equivalence which tells us that marginal utility per dollar must be same for all products consumed . Or in other words the marginal utility received from the last dollar spent on each good must be same , only this can lead to utility maximization .