Utility Maximization
- Select a specific consumer behavior and construct a “mini case study” that highlights the workings of marginal utility and how it affects the consumption pattern for goods and services.
- Explain the roles total utility and marginal utility play to understand change in the consumer’s behavior and preferences.
- Does the law of diminishing marginal utility hold for all goods and services we buy and consume? What are the exceptions?
One of the main principles behind mainstream, neoclassical economic theory, is that individuals act to maximize their utility. Utility is generally defined as a satisfaction (pleasure) that an individual derives from consuming or using a specific good or service. Total utility indicates the total amount of satisfaction or pleasure an individual derives from consuming some specific quantity of a good or service. Marginal utility refers to the additional satisfaction a consumer gets from an additional unit of a good or service she/he consumes during a given period of time.
The law of diminishing marginal utility states that as an individual consumes more and more units of a specific good or service, the additional utility the consumer derives from the successive units keep on diminishing (declining) over time. Thus diminishing marginal utility explains a lot about consumer behavior in the market economy.
