Page 560 - Krugmans Economics for AP Text Book_Neat

Spending the Marginal Dollar
The marginal utility per dollar spent
on a good or service is the additional utility
As we’ve just seen, we can find Sammy’s optimal consumption choice by finding the
from spending one more dollar on that good
total utility he receives from each consumption bundle on his budget line and then
or service.
choosing the bundle at which total utility is maximized. But we can use marginal
analysis instead, turning Sammy’s problem of finding his optimal consumption choice
into a “how much” problem. How do we do this? By thinking about choosing an opti-
mal consumption bundle as a problem of how much to spend on each good. That is, to find
the optimal consumption bundle with marginal analysis we ask the question of
whether Sammy can make himself better off by spending a little bit more of his income
on clams and less on potatoes, or by doing the opposite—spending a little bit more on
potatoes and less on clams. In other words, the marginal decision is a question of how
to spend the marginal dollar—how to allocate an additional dollar between clams and po-
tatoes in a way that maximizes utility.
Our first step in applying marginal analysis is to ask if Sammy is made better off by
spending an additional dollar on either good; and if so, by how much is he better off.
To answer this question we must calculate the marginal utility per dollar spent on ei-
ther clams or potatoes—how much additional utility Sammy gets from spending an ad-
ditional dollar on either good.

Marginal Utility per Dollar
We’ve already introduced the concept of marginal utility, the additional utility a con-
sumer gets from consuming one more unit of a good or service; now let’s see how this
concept can be used to derive the related measure of marginal utility per dollar.
Table 51.3 shows how to calculate the marginal utility per dollar spent on clams and
potatoes, respectively.

table 51.3

Sammy’s Marginal Utility per Dollar
(a) Clams (price of clams = $4 per pound) (b) Potatoes (price of potatoes = $2 per pound)
Marginal Marginal
utility per Marginal utility per Marginal
Quantity of Utility from pound of utility per Quantity of Utility from pound of utility per
clams clams clams dollar potatoes potatoes potatoes dollar
(pounds) (utils) (utils) (utils) (pounds) (utils) (utils) (utils)
0 0 0 0
15 3.75 11.5 5.75
1 15 1 11.5
10 2.50 9.9 4.95
2 25 2 21.4
6 1.50 8.4 4.20
3 31 3 29.8
3 0.75 7.0 3.50
4 34 4 36.8
2 0.50 5.7 2.85
5 36 5 42.5
4.5 2.25
6 47.0
3.5 1.75
7 50.5
2.7 1.35
8 53.2
2.0 1.00
9 55.2
1.5 0.75
10 56.7

518 section 9 Behind the Demand Curve: Consumer Choice