Question

Someone was kind enough to help me with this question, but i was still confused on how they helped me with the first part of my question.


The original question was:

You go to an auction and set a maximum price of $100 you are willing to bid on an item. However, you are fortunate and purchase it for $50.

1) Does the lower price alter the marginal utility you originally placed on the item?

The answer that was given me for Number 1 was:

1) Under the most common utility functions, No. Price paid is independent of the marginal utility received.

I am not quite sure if i understand this answer, can someone help me understand it more. Thanks

Answer 1

So, you go the frige and find an apple. You bite into it, and its delicious. You get positive utility. Then you see a grocery receipt lying on the table. Your mother paid $3 per pound for the apples. Does this change the utility you got from eating the apple. (no). Opps, you mis-read the receipt, she actually paid 0.30 cents per pound. Does this change your utility (again no).

Most utility functions are of the form U=f(x1,x2,...xn) where x are the different goods you could consume. Nowhere in the function is the prices of each x. Utility comes from the consumption of the various goods. And more consumption give more utility. (That said, one could have a utility function that included the price paid. But this would be unusual).

Answer 2

Thanks for the clarification, means alot.

Answer 3

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