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Marginal Utility

A

asmkdas

Member
"The marginal utility per Rs.1 spent on B is less than the marginal utility per Rs.1 spent on A. To increase total utility consumer should buy Less than B"
Would anyone like to elaborate the concept behind this. (Source: IAI CT7 1111 Exam, Question No.16)
 
Marginal utility is the satisfaction derived from consuming an additional unit of a good.

If you derive more satisfaction from buying £1 of Apples than you do from buying £1 of Bananas (ie the marginal utility of £1 of B is less than the marginal utility of £1 of A), then it makes sense that you should buy more Apples and fewer Bananas (ie less of B).
 
But remember that marginal utility decreases as you have more of something (for example, eating one ice cream might make me very happy, but if I eat a thousand ice creams that's probably not going to make me much happier!)


So, in Anna's example, if your marginal utility is currently higher for apples than bananas, it doesn't mean you should spend all your money on apples. It means you should buy apples until the marginal utility of another £1 of apples falls below that of a £1 of bananas, at which point you would switch and buy bananas.
 
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