Question

3. Use the law of diminishing marginal utility to explain why Domino's and Pizza Hut allow the purchase of a second pizza for only $5 when one pays full price (around $10) for the first pizza. Why not simply charge $7 a pizza instead?

4 Explain why the long-run average cost is typically U-shaped. Explain the connection between the shape of long-run average cost curve and returns to scale.

Answer 1

Answer 1 - The law of diminishing marginal utility states that as the consumer goes on consuming more and more units of a good , the utility derived from the additional unit goes on decreasing. Hence if the consumer has consumed the first pizza , he will consume the second pizza with lesser utility. This will make him demand less pizza. To motivate his demand , the pizza hut and dominos offer the second pizza with lesser price to motivate him to demand more.