You go to an auction and set a maximum price of $100 you are willing to bid on an item. However, you are fortunate and purchase it for $50.
1) Does the lower price alter the marginal utility you originally placed on the item?
2) Is your potential total utility increased because of the lower price?
1) Under the most common utility functions, No. Price paid is independent of the marginal utility received.
2) Yes, Instead of getting the item for $100, you get the item plus have $50 to spend on something else.
(Note: in future posts, I suggest you let us know what you think the answer is. We would much rather critique your thinking than to just give you the answer right out.)
Thank you. I will remember the advice in the future:)
1) The lower price does not alter the marginal utility you originally placed on the item. Marginal utility refers to the additional satisfaction or value derived from consuming or acquiring one more unit of a good or service. It is determined by the individual's preferences and subjective evaluation of the item's usefulness or desirability. In this case, your willingness to bid up to $100 indicates the maximum amount of satisfaction or value you believed the item would provide to you. The fact that you were able to purchase it for $50 instead does not change your initial assessment of its value.
2) Your potential total utility may or may not be increased because of the lower price. Total utility refers to the overall satisfaction or value derived from consuming or acquiring a certain quantity of a good or service. It is the sum of the marginal utilities obtained from each unit consumed or acquired.
If the item's marginal utility remains constant regardless of the price, then your potential total utility would indeed be increased because you acquired the item at a lower price than your maximum willingness to pay. Since you paid less than you originally thought the item was worth, you have obtained a higher value (in terms of utility) for each dollar spent, resulting in potentially higher total utility.
However, if the item's marginal utility decreases as the price decreases, then your total utility may not necessarily increase. In this case, the lower price would reduce the item's value in your eyes, meaning that you would derive less overall satisfaction from owning it, even though you paid less than your maximum bid.
Overall, whether or not your potential total utility is increased due to the lower price depends on the relationship between the price and the marginal utility you assign to the item.