Question

If the marginal utility for a BMW (a luxury car brand) is greater than the marginal...

If the marginal utility for a BMW (a luxury car brand) is greater than the marginal utility for a Toyota Camry (a standard car), the consumer can purchase either either, then the consmer will purchase the BMW. Do you agree with this statement? What might be problems with this statement? Explain. What else does a consumer consider and how is that factored in the decision?

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Answer #1

This statement is false because consumer aims at maximizing his utility by consuming at point where the ratio of marginal utility of each good to the price of the good must equal the marginal utility of money. When marginal utility of bmw exceeds marginal utility of toyota, individual will tend to increase the consumption of bmw that will cause its MU to fall ( due to law of diminishing marginal utility). Factoring in the prices of the two goods only the ratio of MU of Bmw to its price will exceed the ratio of MU oftoyota to its price, as price of bmw is higher than the price of toyota. Hence the equilibrium will be reached by consuming more of bmw.

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