|
Why, if socks only cost $7 a pair, doesn't she just go ahead and buy 6 pairs. After all, 6 pairs would cost her 6 x 7 = $42 and she would enjoy a utility of 51. Isn't a utility of 51 for the price of $42 a good deal? Using marginal analysis we can explain why this reasoning isn't correct.
Even though total utility is greater than total cost, if she buys a 5th pair of socks for $7 her utility only increases by $5 (the marginal utility of the 5th pair is 5). This means she gives up $7 to buy something worth only $5 to her. By comparing only total cost and total utility we mistakenly assume the 5th pair is worth buying, when in fact she's worse off by $2. The 6th pair is an even worse deal. They only provide her with $2 worth of added utility at a price of $7; she's paying $7 for something worth only $2, never a good idea.
|
|
Wool Sock Utility
|
| Quantity | Total Utility |
| 1 | 15 |
| 2 | 27 |
| 3 | 37 |
| 4 | 44 |
| 5 | 49 |
| 6 | 51 |
|
