Lesson: Consumption Choices

Choosing with Marginal Utility (continued)

Choosing with Marginal Utility (continued)

However, if José seeks to go beyond point S to point T, he finds that the loss of marginal utility from giving up the first T-shirt is 22, while the marginal utility gain from the last two movies is only a total of 19. If José were to choose point T, his utility would fall to 100. Through these stages of thinking about marginal trade-offs, José again concludes that S, with one T-shirt and six movies, is the choice that will provide him with the highest level of total utility. This step-by-step approach will reach the same conclusion regardless of José’s starting point. 

We can develop a more systematic way of using this approach by focusing on satisfaction per dollar. If an item costing $5 yields 10 utils, then it is worth 2 utils per dollar spent. Marginal utility per dollar is the amount of additional utility José receives divided by the product's price.  

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The table below shows the marginal utility per dollar for José's T-shirts and movies. 


Quantity of T-Shirts Total Utility Marginal Utility Marginal Utility per Dollar Quantity of Movies Total Utility Marginal Utility Marginal Utility per Dollar
1 22 22 22 / $14 = 1.6 1 16 16 16 / $7 = 2.3
2 43 21 21 / $14 = 1.5 2 31 15 15 / $7 = 2.14
3 63 20 20 / $14 = 1.4 3 45 14 14 / $7 = 2
4 81 18 18 / $14 = 1.3 4 58 13 13 / $7 = 1.9
5 97 16 16 / $14 = 1.1 5 70 12 12 / $7 = 1.7
6 111 14 14 / $14 = 1 6 81 11 11 / $7 = 1.6
7 123 12 12 / $14 = 1.2 7 91 10 10 / $7 = 1.4


If José wants to maximize the utility he gets from his limited budget, he will always purchase the item with the greatest marginal utility per dollar of expenditure (assuming he can afford it with his remaining budget). José starts with no purchases. If he purchases a T-shirt, the marginal utility per dollar spent will be 1.6. If he purchases a movie, the marginal utility per dollar spent will be 2.3. Therefore, José’s first purchase will be the movie. Why? Because it gives him the highest marginal utility per dollar and is affordable.  

Next, José will purchase another movie. Why? Because the marginal utility of the next movie (2.14) is greater than the marginal utility of the next T-shirt (1.6). Note that when José has no T-shirts, the next one is the first one. José will continue to purchase the next good with the highest marginal utility per dollar until he exhausts his budget. He will continue purchasing movies because they give him a greater utility until the sixth movie which gives the same marginal utility per dollar as the first t-shirt purchase. José has just enough budget to purchase both. So, in total, José will purchase six movies and one T-shirt.