Explain the concept of marginal utility per dollar spent.

The concept of marginal utility per dollar spent refers to the additional satisfaction or utility that a consumer derives from spending an additional dollar on a particular good or service. It is a measure of the value or benefit that a consumer obtains from the last unit of a good or service purchased, relative to the price paid for it.

To calculate the marginal utility per dollar spent, one needs to consider both the marginal utility and the price of the good. Marginal utility represents the change in total utility resulting from consuming one additional unit of a good, while the price represents the amount of money required to purchase that unit.

The principle of diminishing marginal utility states that as a consumer consumes more units of a good, the additional satisfaction or utility derived from each additional unit decreases. This means that the marginal utility per unit decreases as consumption increases.

However, when considering the marginal utility per dollar spent, the price of the good is taken into account. If the price of a good is high relative to the marginal utility derived from consuming it, the marginal utility per dollar spent will be low. Conversely, if the price is low relative to the marginal utility, the marginal utility per dollar spent will be high.

For example, let's say a consumer is considering purchasing a chocolate bar. The first chocolate bar consumed may provide a high level of satisfaction, resulting in a high marginal utility. However, if the price of the chocolate bar is also high, the marginal utility per dollar spent may be low. On the other hand, if the price of the chocolate bar is low, the marginal utility per dollar spent may be high, indicating that the consumer is getting a relatively higher level of satisfaction for the price paid.

Understanding the concept of marginal utility per dollar spent is important for consumers in making rational decisions about their spending. By comparing the marginal utility per dollar spent across different goods or services, consumers can determine which ones provide the greatest satisfaction relative to their prices, helping them allocate their limited resources efficiently.