Marginal utility is the additional satisfaction that a consumer derives from consuming an extra unit of a good or service (Epsey 23). Therefore, if two items have the same price, a rational consumer will prioritize the one offering highest utility. Even where the two items have different prices, the consumer will buy the one that will give the highest utility per dollar spent (Bromley 75). However, a consumer will not keep buying more units of that one item always due to the law of diminishing marginal utility. When the marginal utility per dollar for all items becomes even, consumers stop changing proportions of goods consumed as required by the utility maximization rule. Consumption depends on the level of income and the respective price of each good (Reynolds 139).
Every day i visit Dean’s diner for a York Hot Dog (a) and Fries (b). My consumption allocation aims at ensuring that the last cent spent on a hot dog gain equal satisfaction as that spent on fries such that Mua/Pa = Mub/Pb. As a rational consumer, i aim at buying each good as long as the marginal benefit exceeds price and i get maximum utility subject to my budget. If i enjoy the last dollar i spend on fries more; Mub/Pb > Mua/Pa and i will change my eating behavior and buy more Fries and less York Hot Dog. With time, marginal utility of Fries declines, and that of York Hot Dog increases until Mua/Pa=Mub/Pb. On the other hand if the price of York Hot Dog falls or a discount is offered, Mua/Pa > Mub/Pb and i will consume fewer Fries and more of York Hot Dog as it becomes cheaper. Substitution effect occurs as more units of the product with higher marginal utility are consumed than the one offering lower value. An income effect also occurs when price of one commodity falls (Bromley 76).
Bromley, Ray. Opinions and Outcomes: Basic ideas of Microeconomics, 76-80. Phoenix, 2006. Print.
Espey, Molly. APEC 257 National Resources, the Environment and Economics. 2001. Print.
Reynolds, Larry R. Basics Microeconomics, Boise: Textbook Equity, inc, 2011. Print.