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Some people who do not understand the optimal purchase rule argue that if a consumer buys so much of a good that its price equals its marginal utility, the consumer could not possibly be behaving optimally. Rather, they say, the consumer would be better off quitting while ahead or buying a quantity such that marginal utility is much greater than price. What is wrong with this argument? ( Hint : What opportunity would the consumer then miss? Is it maximization of marginal or total utility that serves the consumer’s interests’?)

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Microeconomics: Principles & Policy

14th Edition
William J. Baumol + 2 others
Publisher: Cengage Learning
ISBN: 9781337794992

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Section
BuyFindarrow_forward

Microeconomics: Principles & Policy

14th Edition
William J. Baumol + 2 others
Publisher: Cengage Learning
ISBN: 9781337794992
Chapter 5, Problem 3DQ
Textbook Problem
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Some people who do not understand the optimal purchase rule argue that if a consumer buys so much of a good that its price equals its marginal utility, the consumer could not possibly be behaving optimally. Rather, they say, the consumer would be better off quitting while ahead or buying a quantity such that marginal utility is much greater than price. What is wrong with this argument? (Hint: What opportunity would the consumer then miss? Is it maximization of marginal or total utility that serves the consumer’s interests’?)

To determine

The total utility maximization.

Explanation of Solution

To maximize the total utility obtained by spending money on a commodity X, the consumer must purchase a quantity of X such that the price equals or approximately equals to the commodity's marginal utility (in monetary terms).

   PX=MUX

If the consumer purchases a quantity such that the price is much lower than the marginal utility of commodity, then the consumer starts to purchase more and more quantity of that commodity. So long as the utility is greater than the price, the consumer will go on consuming

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