Rule of Maximizing Utility - Explained
What is the Rule of Maximizing Utility?
Written by Jason Gordon
Updated at March 26th, 2023
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What is the Rule of Maximizing Utility?
When making purchases you should choose the item with the greatest marginal utility per dollar spent (i.e., the most bang for the buck).
For a finite budget (limited funds to expend), and making a choice of the quantity of two goods to purchase, the utility maximizing choice should occur where the marginal utility per dollar spent is the same for both goods.
In summary, when you are deciding how to spend your limited budget between two items, you should (if possible) purchase a quantity of both goods where purchasing the next unit of either good would bring you the exact same value or utility.
This point would be the most valuable or utility-maximizing way to spend your limited budget.
Related Topics
- Total utility
- Marginal Utility
- Diminishing Marginal Utility
- Marginal Utility per Dollar
- Rule of Maximizing Utility
- Consumption
- Consumer Goods
- Changes in Income Affect Consumer Choices
- Changes in Price Affect Consumer Choices
- Substitution Effect
- Income Effect
- Budget Constraints Create Demand Curves
- Lifecycle Model of Consumption
- Autonomous Consumption
- Permanent Income Hypothesis
- Lipstick Effect
- Engel's Law
- Consumerism
- Paradox of Thrift
- Ricardo Barro Effect
- Consumer Confidence Index
- The Wealth Effect
- Behavioral Economics