Water has a higher total utility (usefulness) than diamonds, but it is much less expensive than diamonds. This is because whereas diamonds are rare, water is plentiful, making the marginal utility of diamonds much higher than the marginal utility of water. What are two other goods that you can think that demonstrate that price is determined not by total utility but by marginal utility? Explain how these goods demonstrate the same principles.
What will be an ideal response?
Two different types of goods: (1) a rare and expensive good that is nonessential to people, such as a luxury sports car or a rocket ship, and (2) a plentiful and inexpensive good that is essential to all people, such as grain or oxygen. Students should explain that the rare and expensive good has lower total utility because it is nonessential to human life, but that it has high marginal utility because it is so rare and valuable. By contrast, the plentiful and inexpensive good has higher total utility because it is essential to human life but low marginal utility because it is so plentiful and is free or can be purchased for little money.
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Explain the basic idea of the expenditure multiplier and the role consumers play in determining its magnitude
What will be an ideal response?
Refer to the above table. The table represents information on the costs for Ajax Corporation. Ajax operates in a perfectly competitive market and the price of the product is $9. What does profit equal when quantity equals 3?
A) $13 B) $10 C) $6 D) $2