Marginal Utility, the Ratio of Marginal Utility to Price and the Allocation of Spending Between Two Goods

Abstract

In this module, you will be addressing the first basic consumer decision: how do you allocate a fixed amount of money between two goods in order to maximize the level of total satisfaction? You will start by developing the concept of marginal utility and how it changes the total utility as you change consumption by small amounts. From there you will adjust the marginal utility by incorporating the idea of purchasing the good and creating the concept of the ratio of marginal utility to price which ascertains the change in total utility as you change consumption by one dollar’s worth of the good. With the tool of the ratio of marginal utility to price, you will be able to use the process of reallocation of a fixed amount of spending between two goods to maximize the combined total utility from the purchase and consumption of the two goods.

Keyword Classification Summary

Level: Undergraduate

Setting: Classroom

Activity Type: Learning Cycle

Discipline: Economics

Course: Agricultural Economics

Keywords: Consumption economics, marginal utility, ratio of marginal utility to price