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marginal utility


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The addition to an individual's utility from a small increase in consumption of any good, per unit of the increase. The information content of marginal utility is dependent on whether utility is cardinal or ordinal. If utility is ordinal then positive marginal utility denotes a good and negative marginal utility a bad. The statement that one good has a higher marginal utility than another is meaningful. If utility is cardinal, in addition to the statements for ordinal utility, it is also meaningful to state that the marginal utility of a good declines as more of that good is consumed. The latter property, termed diminishing marginal utility, is connected with the concept of risk aversion. In both cases the ratio of marginal utilities for two goods (the marginal rate of substitution) measures the rate at which the consumer will exchange one good for the other.

Subjects: Economics.


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