Chapter 7.1, Problem 3R

To determine

To evaluate: The concept of diminishing marginal utility along with examples.

Explanation of Solution

Marginal utility can degrade into negative utility, because consuming another unit of any product can become absolutely adverse. Therefore the first consumption unit is typically the maximum for any service, with each consumption unit to follow having less and less value. Through purchasing various quantities of multiple goods, consumers counter the law of decreasing marginal utility.

Three examples of diminishing marginal utility are:

1. When people put their money into a daily paper buying machine, the device opens and they could possibly take over one daily paper with them. That being said, getting more than one copy of the same newspaper is usually little or no satisfaction.
2. A family of three buys passes to an amusement park, and it is said that there is an offer of "buy three, get fourth free." But, from that fourth pass, there is no additional joy, because they only need three passes. Even so, they would have positive marginal utility on the fourth ticket if they had a relative or friend they chose to take with them.
3. An individual may win two tickets for an airline, but if on those specific dates there is no one to accompany to that particular destination, there is no more satisfaction in getting that second ticket.

Economics Concept Introduction

Introduction: The Law of Diminishing Marginal Utility implies that all else equals as consumption raises the marginal utility obtained from each unit decreases with every additional unit.