Question

1.Suppose that an individual consumes only two goods. What will happen to the individual if her last dollar spent on one good yields more marginal utility than that from another good?

2.Suppose a family purchases 10,000 gallons of water a year at 20 cents a gallon and one diamond ring at a price of $1,000. Can we conclude that the diamond ring provides more utility to the family than water? Explain.

Answer 1

1. When the marginal utility of one good increases over the other the consumer will want to change his combination of good than what being previously consumed. More of the good with increased marginal utility will be consumer.

Taking the budget line into consideration, the indifference curve will change its shape and will interect the budget line at a point with higher number of the said (increased marginal utility ) .

2. No. Without the values for utility ( or utilts ) which measures the total level of satisfaction , it's cannot be concluded one good is preferred over the other.

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