What is the concept of "marginal utility" and how does it influence consumer choice?

• A. The additional satisfaction from consuming one more unit; consumers allocate spending where marginal utility per dollar is highest.
• B. The total satisfaction obtained from all consumption.
• C. Marginal utility is constant for all goods.
• D. Marginal utility declines as income grows.

Answer: (A)

Marginal utility is the extra satisfaction you get from consuming one more unit of a good. When you decide how to spend a limited income, you compare the benefit of the next unit to its cost. The best use of your money is where the marginal utility per dollar is highest across all goods. As you buy more of a good, that extra satisfaction tends to fall, so its value per dollar also falls. You keep reallocating spending so that the marginal utility per dollar is roughly equal across the goods you buy (or you run out of money). This is why consumer choices shift with price changes or income changes: you chase the option that gives the most added happiness per dollar spent.