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Chapter 20: Problem 17

As people age, they typically spend more on luxury goods than when they are younger. Does this mean that diminishing marginal utility of money declines as people age?

Short Answer

Expert verified
Answer: No, it cannot be concluded that the diminishing marginal utility of money declines as people age just because people spend more on luxury goods as they get older. The consumption of luxury goods reflects a change in preferences and lifestyle, which does not necessarily indicate a change in the marginal utility of money.

Step by step solution

01

Understand the concept of diminishing marginal utility

Diminishing marginal utility is an economic principle stating that as a person consumes more of a good or service, the additional satisfaction (utility) they receive from each additional unit of the good or service decreases. In the context of money, diminishing marginal utility means that each extra dollar of income brings less utility compared to the previous dollar earned.
02

Consider the spending habits of older people

It is given that as people age, they typically spend more on luxury goods than when they are younger. Luxury goods are items that are not essential for survival but improve one's quality of life. The increased spending on luxury goods could be due to various reasons, such as having accumulated wealth, having fewer financial responsibilities, or having higher disposable income.
03

Analyze the relationship between diminishing marginal utility and age

If the diminishing marginal utility of money declines as people age, this would imply that each additional dollar earned becomes more important to them, despite spending more on luxury goods. But, in this context, it is essential to note that increased consumption of luxury goods does not directly indicate the diminishing marginal utility of money. Instead, it reflects people's preferences and, therefore, their willingness to spend money on luxury items.
04

Evaluate the statement

Based on the analysis in the previous steps, it cannot be concluded that diminishing marginal utility of money declines with age, just because people spend more on luxury goods as they get older. The consumption of luxury goods reflects a change in preferences and lifestyle, which does not necessarily indicate a change in the marginal utility of money. In conclusion, while aging may be associated with a greater willingness to spend on luxury goods, it does not imply that the diminishing marginal utility of money declines as people age.

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Most popular questions from this chapter

Would it make any sense to say that, since a change in tax policy makes Jorge lose utility while Mary and Demitri gain utility, the policy is good if the loss in Jorge’s utility is less than the combined gain in Mary and Demitri’s utilities? How about the other way around—Jorge’s loss of utility is greater than Mary and Demitri’s combined gain?

How would guests’ behavior be likely to differ at a BYOB (bring your own bottle) party from one at which the host provides the drinks? Explain your answer.

Using utility, explain the following commonly Using utility, explain the following commonly made statements: a. I couldn't cat another bite. b. I'll never get tired of your cooking. c. The last drop tastes as good as the first. d. I wouldn’t eat broccoli if you paid me. e. My kid would eat nothing but junk food if I allowed her. f. Any job worth doing is worth doing well.

Using the following information, calculate total utility and marginal utility. a. Plot the total utility curve. b. Plot marginal utility directly below total utility. c. At what marginal utility value does total utility reach a maximum? \(\begin{array}{lr}\text { Number of utils for the first unit } & 300 \\ \text { Number of utils for the second unit } & 250 \\ \text { Number of utils for the third unit } & 220 \\ \text { Number of utils for the fourth unit } & 160 \\\ \text { Number of utils for the fifth unit } & 100 \\ \text { Number of utils for the sixth unit } & 50 \\ \text { Number of utils for the seventh unit } & 20 \\ \text { Number of utils for the eighth unit } & 0 \\ \text { Number of utils for the ninth unit } & -250\end{array}\)

Many people who earn incomes below some level receive food stamps from the government. Economists argue that these people would be better off if the government gave them the cash equivalent of the food stamps rather than the food stamps. What is the basis of the economists’ argument?
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