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Macroeconomics 15th Edition by James Gwartney, Richard Stroup, Russell Sobel, David Macpherson
Edition 15ISBN: 9781305176799Macroeconomics 15th Edition by James Gwartney, Richard Stroup, Russell Sobel, David Macpherson
Edition 15ISBN: 9781305176799 Exercise 1
A restaurant offers an "all you can eat" lunch buffet for $10. Shawn has already eaten three servings, and is trying to decide whether to go back for a fourth. Describe how Shawn can use marginal analysis to make his decision.
Explanation
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Marginal analysis is the analysis of cost and benefit that everyone does at the back of mind before considering any "additional" unit of a good or service. Every good or service has a want satisfying characteristics and this generates the demand for the same. However every incremental unit of consumption of a good has an associated incremental cost along with benefit. As long as the incremental cost is either equal to or less than the benefit it is rational to consume more as the additional consumption will add satisfaction. It is also interesting to note that the consumption of additional unit is dependent on the total pleasure derived from all the units of consumption. As one continues to consume more every incremental unit gives pleasure at a diminishing rate. When a person is thirsty he will have a glass of water which will quench the thirst but as one continues to consume more glass of water the pleasure decreases as thirst gets quenched.
When Shawn had already consumed three servings his pleasure for fourth serving would be much less compared to his first three as his hunger gets satisfied. However he is analyzing the utility derived from fourth serving with the marginal cost of the fourth serving of the total amount he paid that is $10 for the buffet.
He will not consume the fourth serving if he derives negative pleasure from the additional fourth unit.
When Shawn had already consumed three servings his pleasure for fourth serving would be much less compared to his first three as his hunger gets satisfied. However he is analyzing the utility derived from fourth serving with the marginal cost of the fourth serving of the total amount he paid that is $10 for the buffet.
He will not consume the fourth serving if he derives negative pleasure from the additional fourth unit.
Macroeconomics 15th Edition by James Gwartney, Richard Stroup, Russell Sobel, David Macpherson
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