Lesson: Consumption Choices

Work It Out: Decision Making by Comparing Marginal Utility

Work It Out: Decision Making by Comparing Marginal Utility

José could use the following thought process (if he thought in utils) to make his decision regarding how many T-shirts and movies to purchase: 

Step 1: From the table below, José can see that the marginal utility of the fourth T-shirt is 18. If José gives up the fourth T-shirt, then he loses 18 utils. 

T-Shirts (Quantity) Total Utility Marginal Utility Movies (Quantity) Total Utility Marginal Utility
1 22 22 1 16 16
2 43 21 2 31 15
3 63 20 3 45 14
4 81 18 4 58 13
5 97 16 5 70 12
6 111 14 6 81 11
7 123 12 7 91 10
8 133 10 8 100 9


Step 2: Giving up the fourth T-shirt, however, frees up $14 (the price of a T-shirt), allowing José to buy the first two movies (at $7 each).

Step 3: José knows that the marginal utility of the first movie is 16 and the marginal utility of the second movie is 15. Thus, if José moves from point P to point Q, he gives up 18 utils (from the T-shirt) but gains 31 utils (from the movies). 

Step 4: Gaining 31 utils and losing 18 utils is a net gain of 13. This is just another way of saying that the total utility at Q (94 according to the last column in the table below) is 13 more than the total utility at P (81). 

T-Shirts (Quantity) Total Utility Marginal Utility Movies (Quantity)
P 4 0 81 + 0 = 81
Q 3 2 63 + 31 = 94
R 2 4 43 + 58 = 101
S 1 6 22 + 81 = 103
T 0 8 0 + 100 = 100


Step 5: Thus, for José, it makes sense to give up the fourth T-shirt to buy two movies.