A utility-maximizing consumer equalizes marginal utilities across all goods. Group of answer choices True False
The correct answer and explanation is:
Correct answer: True
A utility-maximizing consumer aims to allocate their budget in a way that maximizes their total satisfaction or utility. To do this, the consumer compares the additional satisfaction gained from consuming one more unit of a good, called marginal utility, relative to the price of that good. The principle of utility maximization states that the consumer will adjust their consumption of goods until the marginal utility per unit of currency spent is equal across all goods.
This means that the ratio of marginal utility (MU) to price (P) for each good should be the same:
MU₁ / P₁ = MU₂ / P₂ = … = MUₙ / Pₙ
If this condition is not met, the consumer can increase total utility by spending more on the good with higher marginal utility per dollar and less on the one with lower marginal utility per dollar.
Equalizing marginal utilities across all goods without considering their prices is incomplete. It is the equalization of the marginal utility per unit of cost that drives utility maximization. For example, if good A provides more marginal utility per dollar than good B, the consumer should buy more of good A and less of good B until the marginal utility per dollar is equal.
In summary, the utility-maximizing consumer equalizes the marginal utility per unit of currency spent across all goods, which ensures the best possible satisfaction given their budget constraints. This concept is a fundamental part of consumer theory in economics and explains how consumers make choices among different goods and services to maximize their overall happiness or utility.