- A Reasonable Way To Measure The Value Of A Good Or Service Is To Look At Its Price This Does Fall Short Though Since D 1 (199.63 KiB) Viewed 27 times
A reasonable way to measure the value of a good or service is to look at its price. This does fall short though, since different people will have different values for the same product. To solve this, economists use utility as a measurement of value that is separate from price. Utility describes the enjoyment or satisfaction received from a product. UTILITY OVER TIME Suppose the same song plays repeatedly on a stream. It's a good song, and the first time you hear it is equivilant to 5 utils of enjoyment. Hearing it a second time raises your enjoyment to 9 utils. A third time though, and your total utility is 7. The fourth time the song plays, your utility is 2. The fifth and sixth repetitions bring your utility to -5 and -20, respectively. DA Write down the marginal utility for each time the song plays. Is the marginal utility changing at an increasing, or decreasing rate? OPTIMAL ALLOCATION ANALYSIS Imagine someone consumes a certain quantity of Good 1 and of Good 2. Their marginal utility per dollar for both 1 and 2 are balanced. In other words, MU1/$=MU2/$. Now suppose his or her tastes and preferences remain unchanged. Their marginal utility for them remains the same. Despite this, one day they begin purchasing less of good one and more of good two. What could have caused this reallocation? Define the Income Effect and the Substitution Effect.