[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

A
B
WILLINGNESS TO PAY
1,000
800
600
400
Utility curve
MARGINAL UTILITY
100
80
60
40
Marginal
utility curve
200
20
0
5 10 15 20
NUMBER OF SWEATSHIRTS
0
5 10 15 20
NUMBER OF SWEATSHIRTS
Figure 5.7
UTILITY AND MARGINAL UTILITY
Panel A shows that utility increases continually with consumption but tends to level off
as consumption climbs higher. Panel B explicitly shows marginal utility; notice that it
declines as consumption increases.
utility of 400, 6 a utility of 456, and 7 sweatshirts a utility of 508. Mary’s willingness to
pay increases with the number of sweatshirts, reflecting the fact that additional sweatshirts
give her additional utility. The extra utility of an additional sweatshirt, measured
here by the additional amount she is willing to pay, is the marginal utility. The
numbers in the third column of Table 5.1 give the marginal (or extra) utility she received
from her most recently purchased sweatshirt. When Mary owns 5 sweatshirts,
an additional sweatshirt yields her an additional or marginal utility of 56 (456–400);
when she owns 6 sweatshirts, an additional one gives her a marginal utility of only
52 (508–456). Figure 5.7B traces the marginal utilities of each of these increments. 4
As an individual’s bundle of goods includes more and more of a good, each successive
increment increases her utility less. This is the law of diminishing marginal utility.
The first sweatshirt is very desirable, and additional ones are attractive as well. But
each sweatshirt does not increase utility by as much as the one before, and at some point,
Mary may get almost no additional pleasure from adding to her sweatshirt wardrobe.
When Mary has a given budget and must choose between two goods that cost the
same, say sweatshirts and pizza, each of which costs $15, she will make her choice
so that the marginal utility of each good is the same. Table 5.1 shows Mary’s willingness
to pay (utility) for both sweatshirts and pizza. Suppose Mary has a $300 budget
for sweatshirts and pizza. Look at what happens if she buys 20 sweatshirts with her
money and no pizza. The marginal utility of the last sweatshirt is 24, and that of the
first pizza is 36. If she switches $15 from sweatshirts to pizza, she loses a utility of 24
from the decreased sweatshirt, but gains 36 from her first pizza. It obviously pays
for her to switch.
Now look at the situation when she has decreased her purchases of sweatshirts
to 17 and increased purchases of pizza to 3. The marginal utility of the last sweatshirt
4 Since marginal utility is the extra utility from an extra unit of consumption, it is measured by the slope of the
utility curve in panel A.
114 ∂ CHAPTER 5 THE CONSUMPTION DECISION