Question

Explain the significance of consumer behavior to the economy in terms of marginal utility, total utility, and diminishing utility on the economy. What is the difference in consumer behavior in the United States compaired to China?

Answer 1

The rational consumers in the economy equate the marginal utility obtained from the good with the price of the good and consume the good up to the point where marginal utility from the good is equal to price of the good. Increase in the consumption of the good beyond a certain limit leads to diminishing marginal utility as satisfaction derived from the good decreases with increase in per unit of consumption of the good. This is important for the economy as prices are set based on the marginal utility of production of the good.

Compared to China, people in the United States are spendthrift and spend more. Savings are low in the United States thus consumption levels are high as opposed to the case in China where people both save and consume. Thus, prices are set accordingly in the economy.