📚 Learning Guide
Marginal Analysis
hard

In the context of rational behavior and utility maximization, how does an individual decide to consume an additional unit of a good based on marginal cost?

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Choose the Best Answer

A

If the marginal cost is less than the marginal utility gained

B

If the marginal utility is equal to the total cost

C

If the total utility exceeds the marginal cost

D

If the marginal cost is greater than the average cost

Understanding the Answer

Let's break down why this is correct

Answer

When an individual decides whether to consume an additional unit of a good, they think about the satisfaction or utility that this extra unit will bring them. This is called marginal utility, which is the additional satisfaction gained from consuming one more unit. At the same time, they also consider the marginal cost, which is the cost of obtaining that extra unit. If the marginal utility of the good is greater than the marginal cost, it makes sense for the person to consume that additional unit because they are gaining more satisfaction than they are spending. For example, if a person enjoys eating pizza and the satisfaction from one more slice is worth $3, but the price of that slice is only $2, they would choose to buy the slice because the benefit outweighs the cost.

Detailed Explanation

A person will buy more of something if the extra cost is less than the extra happiness they get from it. Other options are incorrect because Some might think that if the extra happiness equals the total cost, it's a good choice; People might think that as long as total happiness is more than the extra cost, it's okay.

Key Concepts

marginal cost
utility maximization
rational behavior
Topic

Marginal Analysis

Difficulty

hard level question

Cognitive Level

understand

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