Question

Can you explain how does the willingness to give up some spending impact the trade-off for allocation of your budget to other items?

This question comes from the Principles of Microeconomics book or ECO 202 class.

Answer 1

The willingness to give up some spending leaves some income of the consumer unutilised. Now the consumer can utilise this income for purchase of other goods. We assume that consumer spends all his income. Further it is assumed that marginal utility of money falls as income increases. Given these assumptions the marginal utility of money expenditure on other goods will fall. Now to equate marginal utility of last unit of currency with prices of goods (so as to maximise utility and achieve equilbrium) would require greater purchase of other goods. Thus the consumer will be willing to tradeoff more money for increase in quantity of other goods