1.6 Marginal Analysis and Consumer Choice

Utility is the satisfaction a consumer gets from consumption, and marginal utility is the extra satisfaction from one more unit. The law of diminishing marginal utility says each additional unit adds less satisfaction than the one before — the second slice of pizza is good, the sixth barely registers.

With a limited budget, the utility-maximizing rule is to spend each dollar on whichever good delivers the most marginal utility per dollar (MU ÷ P). The optimal bundle is reached when MUx/Px = MUy/Py and the budget is exhausted — no dollar can be reallocated to gain utility.

On table-based questions, compute MU per dollar for every unit of each good first, then 'buy' units in descending order until the budget runs out. If MUx/Px > MUy/Py at your current bundle, buy more X and less Y.