Syndicate
Buying As Much As Possible
Let’s pretend that you have $10 on you that you are allowed to spend. $10 is not a lot of money so you are going to need to think well on how to spend it in the best way possible and the logical thing would be to see how much utility I can get out of it with this limited budget. So along with some friends you decide that you want to go and get some hamburgers. Now these hamburgers can make you happy, however, the objective is not only to be happy, but rather to be as happy as is possible given the limited amount of cash you have. This means that you want every dollar to buy you as much utility as is possible.
Remember that you do not care where the utility came from. A unit of utility of anything else probably makes you just as happy as a unit of utility of a hamburger; the only thing that matters here is to buy as many units of utility as you can.
In order to do this, the key concept is the price of the utility. The hamburger in this case has measured prices in dollars, but what is the price of a unit of utility? In order to see how this works out it is necessary to show it on a simply chart and include in information.
It would look something like the following:
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In the last two lines we have been able to calculate how much it costs to have a little bit more of marginal utility (which in this case is equal to happiness) if the way you are bringing it about is buying hamburgers.
Take a look at the fourth line; this one has a $1 per hamburger. If we were to only get one hamburger, it provides you with a marginal utility of 20 units of utility at the cost of $1. This means that the marginal utility per dollar of the first one is 20.
Ok so now we need to see how to spend the next dollar and if you are like a lot of people, you will probably want another hamburger. Given that the second hamburger provides a marginal utility out of only sixteen units of utility, the marginal utility per dollar spend here is only of sixteen; given that the decreasing marginal utility makes the marginal utility of each additional hamburger continues to decrease, each additional dollar that you spend actually buys you less additional utility then the previous dollar.
The last line of the chart contains the marginal utility per dollar that you would get from the hamburger, but this would actually depend on how much you spend on each hamburger. If the hamburger costs $2 each, each spent dollar provides you with less marginal utility then when the hamburger only cost $1 per slice.