In this assignment you will apply consumer choice theory and marginal analysis t
ID: 1167601 • Letter: I
Question
In this assignment you will apply consumer choice theory and marginal analysis to business problems.
Consider each of the following products and services:
a pair of tickets to a sporting or cultural event that you enjoy
a can of common table salt
a college class
In a two-page essay:
Suppose your household budget was suddenly doubled because you received a 100% raise. How would your consumption of each of these goods and services change? Explain your answer in terms of utility and marginal analysis.
What is the law of diminishing marginal utility? How does this law affect the ability of table salt companies to stimulate demand for their product?
Explanation / Answer
(1)
(a) Ticket to cultural event.
As you keep increasing the number of such events attended, equipped with a higher income, total utility starts increasing. But after total utility is maximized, each additional event gives a lower unit of utility than before. In other words, the marginal utility from attending additional events starts decreasing.
This is called the law of diminishing marginal utility.
So, while you initially keep increasing consumption, eventually your consumption will start decreasing, and will stop at the point where marginal utility becomes negative.
(b) Table salt.
However, the situation is slightly different in case of table salt. This is a product that cannot be consumed stand-alone (nobody keeps eating more of raw salt only because they can now afford more!!), consumption of salt will increase proportionately with the increase in consumption of cooked, salted food. Therefore, salt consumption will depend on how much of its complementary product - the cooked food, that is - is being consumed. It can be assumed that the cooked dish is subject to the law of diminishing returns, so as its consumption initially increases, salt consumption increases as well. As consumption of cooked food starts decreasing, consumption of salt also starts decreasing & will stop when no more of the food item is consumed.
Table salt companies can promote their products as a bundling offer with food items that show very slow rate of dimnishing marginal utility - the necessity items, mostly.
(c) College class
This is completely independent of a change in income. If income of a student increases, it does not increase the number of classes in a college course, which is fixed. No lawy of marginal returns is applicable here.