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What is the law of diminishing marginal utility

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Questions

1. What is the law of diminishing marginal utility? Does this law apply to anyone consuming any good? Give some examples of possible exceptions to the law of diminishing marginal utility.

2. Suppose that an individual allocates his or her entire budget between two goods, food and clothing. Can both goods be inferior? Explain.

Numerical/Graphical Questions

3. You're having a party and need to buy beer ($5 a unit) and wine ($10 a unit). You have $100. a. Suppose your preference is given by U(w, b) = min (w, b) where w is wine and b is beer, how many of each would you buy? How would you categorize the two goods in terms of their substitutability?

b. What if your preference for wine and beer is instead given by U(w, b) = w + b, what would you buy and how would you categorize the two goods in terms of their substitutability?

c. Suppose wine and beer are perfect substitutes but the marginal utility of wine is triple that of beer, what would be the new utility function and what would you buy for each good?

Reference no: EM133575489

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