One of the main principles behind mainstream, neoclassical economic theory, is that individuals act to maximize their
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- One of the main principles behind mainstream, neoclassical economic theory, is that individuals act to maximize their utility. A 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.
- One of the most interesting areas in utility theory is the paradox of value. There is a paradox of value due to the fact that absolute necessities such as water and air are valued (priced) very cheaply, whereas other products like the diamond, which are not necessities, are highly valued and command the most outrageous prices.
- ● 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.
- ● Using the Diamond-Water Paradox as a guide and two other goods of your choice, illustrate the paradox of value.
- ● Explain the roles total utility and marginal utility play to understand this paradox
Related Book For
Accounting for Decision Making and Control
ISBN: 978-0078025747
8th edition
Authors: Jerold Zimmerman
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