Assignment Activity Unit 4

By

Nang San Poung

The Dilemma of Utility Maximization: A Critical Evaluation of Consumption Choices

In this assignment, we are going to discuss the role of the marginal utility concept, including
utility maximization, trade-offs, and preferences, considering how changes in income and prices
impact consumer decisions through scenarios like Emily’s dilemma.

Given information,

Emily has $60 to spend on two goods: books and video games, while the price of the book is $10
per book and $15 per game for the video game.

Emily’s Preferences

Marginal utility refers to the additional satisfaction or benefit a consumer receives from one
additional unit of a good or service. By considering the given information, Emily will purchase
more video games than books, as they provide more satisfaction by comparing their marginal
utilities to their prices. However, the cost of the items must also be taken into account. Though
they may be more fun, she may need to purchase fewer video games to purchase books. When it
comes to determining how much good to consume, she needs to weigh the trade-offs between her
budget and the marginal utility that each good provides. She might run out of money to purchase
books that are useful for her life if she spends all her money on video games.

Emily’s utility-maximizing approach

Individuals make choices to maximize their utility, which represents the satisfaction or well-
being derived from the goods or services. In other words, people divide their income in a way
that optimizes their overall well-being.

According to the given information, Emily has $60 to spend on video games and books. Yes, her
allocation of $60 between books and video games results in the highest satisfaction if she
purchases 4 video games and 1 book. However, four video games cost $60, and there is no
money left for the book. Inversely, if Emily purchases 3 video games and 1 book, she will still
have high satisfaction.

A scenario where Emily’s income increases

In this scenario, the increases in Emily’s income allow her to spend on video games and books
from $60 to $100. These changes can influence Emily’s consumption choices by altering her
purchasing power, financial priorities, and perceptions of value. However, consumption choices
will also depend on the concept of diminishing marginal utility, which refers to the additional
satisfaction derived from consuming an additional unit of a good as more of the goods are
consumed. If her behavior aligns with this concept, she might not spend all her extra income on
books and video games. Instead, she might save it or spend it on other fields.

Price changes can influence consumer decisions by affecting the marginal utility per dollar spent
on a good. If the price of a good increases, the marginal utility per dollar spent decreases, making
the good less attractive to the consumer. Conversely, if the price decreases, the marginal utility
per dollar spent increases, making the good more attractive.

In summary, consumption choice and utility maximization play crucial roles in business, as they
are the fundamental concepts that can help us understand how individuals make rational
decisions about consumption in economics.

References:

Shapiro, D., MacDonald, D., Greenlaw, S. A., Dodge, E., Gamez, C., Jauregui, Andres., Keenan,
D., Moledina, A., Richardson, C., & Sonenshine, R. (2023). Principles of microeconomics (3rd
ed.)