Today's Question
Consumers try to maximize their 'utility' (satisfaction) given their limited budget. If you have $50 for entertainment and movies cost $15 while concerts cost $30, how do you decide what to buy? Economists say you should compare the 'marginal utility per dollar' of each option. What does this mean in plain language?
Model Answer
Ask yourself: 'How much extra happiness do I get per dollar spent?' If a movie gives you 45 'happiness points' and costs $15, that's 3 points per dollar. If a concert gives you 90 points for $30, that's also 3 points per dollar - you'd be indifferent. But if concerts give you 120 points for $30 (4 points/dollar), you should buy concerts first until they become less exciting. Spend where you get the most bang for your buck!