For being such a hard worker, you are going to receive $50 to spend this weekend. How are you going to spend your $50? Explain your choices in terms of the equimarginal rule. Could your utility be changed if you were to make other spending choices? Why/why not?
I am not sure as to what and how to write this out can someone help me with an example.
Sure! Let's break down how to use the equimarginal rule to make spending choices.
The equimarginal rule states that a person should allocate their resources in a way that maximizes their overall satisfaction or utility. To do this, you need to compare the marginal utility that you receive from each possible spending choice.
Let's say you have $50 to spend this weekend. To apply the equimarginal rule, you need to consider the different options and their associated marginal utilities. For simplicity, let's consider two options: going to the movies and dining out at a restaurant.
First, make a list of the marginal utility you expect to get from each option. Let's assume you estimate the following marginal utilities:
- Going to the movies: 10 utils
- Dining out at a restaurant: 12 utils
Next, divide the cost of each option by its respective marginal utility to get the "bang for your buck". Assuming the movie ticket costs $12 and dinner at the restaurant costs $20, we get the following:
- Movie: $12 / 10 utils = $1.20 per util
- Restaurant: $20 / 12 utils = $1.67 per util
Now, according to the equimarginal rule, you should spend your $50 in a way that brings you equal marginal utility for each dollar spent. In this case, you should allocate your money until the marginal utility per dollar spent is the same for both options.
Let's do the math to find out the optimal spending allocation:
- Movie: $1.20 per util x N utils = $50
- N = $50 / $1.20 per util = 41.67 utils
- Restaurant: $1.67 per util x N utils = $50
- N = $50 / $1.67 per util = 29.94 utils
Based on these calculations, you should spend around $41.67 on going to the movies and $29.94 on dining out at a restaurant to maximize your utility.
Now, could your utility be changed if you were to make other spending choices? Yes, your utility can change based on the marginal utilities and costs associated with different options. If the marginal utility or cost of an option changes, it can impact the optimal allocation for maximizing utility.
For example, if the marginal utility of going to the movies increases to 15 utils, while the cost remains the same, the "bang for your buck" would become:
- Movie: $12 / 15 utils = $0.80 per util
In this case, the optimal allocation would be different, and you might choose to spend more on the movie and less on dining out.
In summary, the equimarginal rule helps guide spending decisions by comparing the marginal utility and costs of different options. By allocating your resources in a way that equalizes the marginal utility per dollar spent, you can maximize your overall satisfaction or utility.