Economists refer to this pattern, the _____, which means that as a person receives more of a good, the additional or marginal utility from each additional unit of the good declines.
A. law of trade-offs
B. law of diminishing marginal utility
C. production possibilities frontier
D. law of increasing marginal utility
The correct answer is B. law of diminishing marginal utility.
The law of diminishing marginal utility states that as an individual consumes more and more units of a good, the additional satisfaction or utility derived from each additional unit of the good decreases. In simpler terms, the law suggests that the more of something a person has, the less value or satisfaction they will derive from each additional unit of that same thing.
This concept is important in economics because it helps explain consumer behavior and decision-making. It suggests that consumers are willing to pay a higher price for the first units of a good because they provide a higher level of satisfaction, but as they consume more of the same good, the marginal utility diminishes, causing them to value each additional unit less and be willing to pay less for it.
Understanding the law of diminishing marginal utility is crucial for businesses and policymakers in setting prices, determining production levels, and maximizing overall consumer satisfaction.