GIGAMIND

Folder:
126 Decision Making
File:
126.005.02 Marginal Utility - Decision making using Relative Marginal Utility

How to make a decision on where to spend money using Relative Marginal Utility

  1. Determine the marginal utility (MU) of each unit of whatever you're measuring. Do it for each group of things. In the video, Sal is comparing the MU for bars of chocolate vs pounds of fruit.
  2. Divide the MU by the price for each unit. In the video Sal says chocolate is $1/bar and fruit is $2/pnd, so the MU for chocolate stayed the same but MU for fruit was cut in half.
  3. Then, given how much money you want to spend, you can look at the MU/P equation and see which option makes the most sense for each incremental amount you want to spend.
    • NOTE: The answer seems to change as you allocate dollars. For the first unit the decision is easy - whichever option has the highest MU/P is chosen. The second unit has to compare the utility of Option A, unit 2, with the utility of Option B, unit 1.

Source:
Tags:
  • economics
  • decision-making