The Principle of Diminishing Marginal Utility (almost always) Holds

John Hilston, Eastern Florida State College,
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Summary

Students will consider several scenarios related to the principle of diminishing marginal utility.


Context for Use

This activity is designed for a principles of microeconomics course. Students will have read the required chapter from a principles of economics textbook. This is a relatively short exercise that can be done in approximately 10 minutes by groups of no more than five students.

Overview

This activity asks students to consider an important economic principle. Does the Principle of Diminishing Marginal Utility always hold true? That's debatable. There are definitely business strategic and public policy implications.

Expected Student Learning Outcomes

Students will be able to evaluate whether the Principle of Diminishing Marginal Utility holds true in some (but not all) scenarios.

Information Given to Students

[This situation could be customized with other examples.]

The Principle of Diminishing Marginal Utility is true for most situations. Looking at each of the following options, in which situation is diminishing marginal utility most likely to occur?

A. A tax deduction is available only (in most cases) for a second home, not a third home. There is diminishing marginal utility with the third home.
B. The government taxes higher incomes at a higher marginal tax rate. This is because people with higher incomes value each additional dollar less (than people with lower incomes).
C. Utility rates for water and electricity rise as usage increases to certain levels. There is diminishing marginal utility with increased use of water and electricity.






Teaching Notes and Tips

A may be true in some cases. That said, if the profit margin on rentals is high, the government's tax policy may not impact decision making. B is hotly debated. It might be a good way to facilitate a debate regarding tax policy. Some would argue that this choice is completely true, while others would posit that the private use of the dollars has higher value than the government use. C may be true in some cases for minimal rate increases. In other cases, the rates would need to be very high to incentivize a change in usage. Obviously, these scenarios were crafted with one economic principle in mind. With some easy edits, different aspects of the principle of diminishing marginal utility could be considered. Examples: 1. Ask students about the utility of each pizza slice. When does diminishing marginal utility happen?; 2. Is money an exception to this principle? What are the implications for tax policy?

Assessment

This exercise precedes a homework or exam with the traditional intro microeconomic questions. For example: with marginal utilities as a given, students could be asked to consider the decreasing marginal utilities alongside the increasing total utility.

References and Resources