Utility+maximizing+rule+-&nbsp;how+can+it+be+applied?+optimal+amount+per+dollar++spent

Utility Maximizing Rule - (textbook def.) //a rule stating that a consumer's utility received from the last dollar spent on each commodity is equal across all goods and services.// (wikipedia.org)//.// The question then becomes, how can I spend the scarce money I have to maximize my utility? The consumer must determine what amount of goods and services as well in this case, health, to purchase assuming a fixed income. The expectation is that the consumer creates what is known as a bundle of goods and services that best satisfies the needs and wants within the income capabilties. This maximum is reached in theory when marginal utility gained from the last dollar spent is equal across all goods and services purchased. To put it plainly, and cite the text book, receiving the most "bang for the buck". The graph below shows the paradigm of tradeoffs between utility, and in this example, health.

The graph above depicts the law of diminishing marginal utility, where each additional unit of health produces a subsequently smaller and smaller quantity of Utility. Thus, the choice of how much of one or the other (health, or utility) to purchase is formed. As you can see, when health is maximized the total utility curve is nearly horizontal, producing little to know utility for additional health at that point.

The equation used to determine when utility is maximized is: where 'x' is one good and 'y' is all other goods. If the left side of the equation is greater than the right, the consumer will purchase more of good 'x'. As good 'x' is purchased more (price and income are fixed), diminishing marginal utility will decrease the marginal utility of 'x' and increase the marginal utility of 'y' until the equation is equal again.

Example Questions: 1) If good X costs $5 and provides a marginal utility of 10 and all other goods Y cost $3 and provides a marginal utility of 6 utility is: A) Minimized B) Equal C) Maximized D) Not enough info Answer C: If you plug the data into the utility maximizing equation, 10 / $5 --> 6 / $3 > 2 = 2. Utility is maximized because each side is equal.

2) In the previous question, if MU of good X was 15, the consumer will: A) buy more of all other goods Y B) buy more of good X C) buy more of both D) buy neither Answer B: The consumer will buy more of X because it provides a better marginal utility per dollar. This will result in the MU decreasing of good X and MU increasing of good Y until the equation holds equal again.

3) Utility maximizing rule states that... A) Utility is maximizes when quantity of health is minimized B) Utility is maximized when quantity of health is maximized C) Utility maximizing is theoretical and cannot therefor be attained in the real world D) Marginal utility gained from the last dollar spent is equal across all goods and services Answer D. Explained plainly by the most bang for the buck idea.