Chapter 6—Consumer Choice: Maximizing Utility and Behavioral Economics I. The Law of Diminishing Marginal Utility A. The law of diminishing marginal utility holds that as the amount of a good consumed increases, the marginal utility of the good decreases. B. The law of diminishing marginal utility should not be used to make interpersonal utility comparisons. For example, the law does not say that a millionaire receives less (or more) utility from an additional dollar than a poor man receives. Instead, it says that for both the millionaire and the poor man, the last dollar has less value for bother the millionaire and the poor man than the next-to-last dollar has. II. The Diamond-Water Paradox A. The diamond-water paradox states that what has great value in use sometimes has little value in exchange, and what has little value in use sometimes has great value in exchange. A knowledge of the difference between total utility and marginal utility is necessary to unravel the diamond-water paradox. B. A good can have high total utility and low marginal utility.
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This note was uploaded on 04/16/2008 for the course ECO 1307 taught by Professor Rice during the Fall '07 term at SMU.