Question

1. How can businesses integrate the idea of the law of diminishing marginal utility into their individual incentive analysis model?

2. Why do cost curves matter? b. Why do marginal amounts matter? c. How do cost curves affect society?

Answer 1

1. The law of diminishing marginal utility states that as the number of units of a good consumed increases, the utility obtained from each additional unit of the good consumed declines after an optimal point. In business models, the firms take into account the incentives of profits and disincentive from losses incurred by the firm. Like the marginal utility from goods, there is diminishing marginal utility from using inputs in the production process. The firm will produce at the point where utility is maximized and uses the inputs only upto the point where the marginal utility (even though diminishing) is positive and does not produce anything beyond the point where the marginal utility is zero or negative.

2. Cost curves show how the costs change with the quantity of the good produced. The objective of the firm is to minimise costs and maximize profits. The cost curve indicates the point where the cost is minimized.

b. Marginal amounts matter since they indicate the additional utility or the additional cost incurred with each additional unit of good produced or an additional unit of input used. This is important in decisions of production based on cost minimization and profit maximization.

c. Cost curves provide information on the cost of externalities and a wide range of other activities having repercussions on society. Analysing the cost curves can help optimising social decisions and reducing the effect of externalities like pollution.