190 04-6 Ordinal Versus Cardinal Rankings The actual unit of measurement for utility is not important. Therefore,an ordinal ranking is sufficient to explain how most individual decisions are made. Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 04-6 Ordinal Versus Cardinal Rankings The actual unit of measurement for utility is not important. Therefore, an ordinal ranking is sufficient to explain how most individual decisions are made
04-7 equimarginal principle Utility Maximizing Rule The consumer's money income should be allocated so that the last dollar spent on each product yields the same amount of extra (marginal)utility MU of product A MU of product B Price of A Price of B Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 04-7 equimarginal principle Utility Maximizing Rule The consumer’s money income should be allocated so that the last dollar spent on each product yields the same amount of extra (marginal) utility MU of product A Price of A MU of product B Price of B =
1907 04-8 OA卫B==...MUe 卫A PB per$of income Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 04-8 MU per $ of income
04-9 0 砂 Diamond-water paradox As noted by Adam Smith,water is essential for life and has a low market price (often a price of zero)while diamonds are not as essential yet have a very high market price. Economics ECONOMICS MANAGEMENT SCHOOL.TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 04-9 Diamond-water paradox • As noted by Adam Smith, water is essential for life and has a low market price (often a price of zero) while diamonds are not as essential yet have a very high market price
04-10 MUw MUa MUw MUd Quantity of water Quantity of diamonds Because individuals consume a large volume of water,the marginal utility of an additional unit of water is relatively low.Since few diamonds are consumed,the marginal utility of an additional diamond is relatively high. Economics ECONOMICS MANAGEMENT SCHOOL,TONGJI UNIVERSITY
Economics ECONOMICS & MANAGEMENT SCHOOL, TONGJI UNIVERSITY 04-10 Because individuals consume a large volume of water, the marginal utility of an additional unit of water is relatively low. Since few diamonds are consumed, the marginal utility of an additional diamond is relatively high