Microeconomics Question from Walter E. Williams:
The concept of marginal utility is subject to the objection that it implies a numerical measurement of total utility. How can we overcome this difficulty? Translate into terms which do not involve the cardinal measurement of utility:
- (a) The law of diminishing marginal utility.
- (b) The Pareto optimality condition that the ratio of the marginal utilities of two goods must equal for all individuals in a free-exchange economy.
Answer
- (a) Each additional unit of a good is preferred less than the previous unit, as measured by the amount of another good the individual is willing to give up to obtain it.
- (b) Pareto Optimality requires that MUx/MUy is equal for all individuals – hence every individual’s allocation is such that an additional unit of x is worth less than its cost in terms of y, and visa versa.
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