Question

The topic of this discussion is on an incredibly important concept in utility maximization: the law of diminishing marginal utility. This term is a reason why the demand curve itself is downward-sloping. Specifically answer this prompt: Can you think of any examples of goods or services where the law of diminishing marginal utility does not apply? If the law of diminishing marginal utility does apply to certain goods or services, how could a business change pricing to take advantage of knowing this law?

Answer 1

The law of diminishing marginal utility states that as consumption of a good keeps on increasing, the marginal utility derived from it starts to fall.

For e.g. a hungry person eating sandwiches would derive high utility as he consumes more sandwiches, however once he is full, say after 3 sandwiches, his marginal utility from additional consumption starts to fall.

However, an exception to the law of diminishing marginal utility are goods which are not continuous in consumption. For e.g. television or air conditioners

People consume just one or two units of these goods and not more, as they serve their purpose with one or two units only.

Businesses change their pricing decisions for these goods and charge them the same per unit to cover their costs and make profits per piece. Pricing strategies like bundling or rationing or discounting are not used for these goods.