Meaning of “diminishing marginal benefits”, its occurrence for goods that have very high value for an economic agent and exceptions to the concept.

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Chapter 4, Problem 2Q

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Meaning of “diminishing marginal benefits”, its occurrence for goods that have very high value for an economic agent and exceptions to the concept.

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Suppose John decides to buy 4 units of food and 4 units of clothing with his $12 budget. Would his marginal utility per dollar spent on food be greater than or less than his marginal utility per dollar spent on clothing? What does this tell you about how he should substitute food for clothing if he wanted to increase his utility without spending any more money?

All goods have diminishing marginal utility, but for some goods (or activities), marginal utility falls quickly as you consume more, while for others, marginal utility falls slowly. Can you think of examples of goods that you continue to enjoy a great deal as your consumption increases? Can you think of goods for which your marginal utility decreases rapidly?

You have just opened a new grocery store. Every item you carry is generic (generic beer, generic bread, generic chicken, etc.). You recently read an article in the Wall Street Journal reporting that the price of recreation is expected to increase by 15 percent. How will this affect your store’s sales of generic food products?