Fred's Consumption Behavior: Explained!
What behavior is Fred exhibiting when the price of pork chops decreases?
A) The law of demand.
B) The law of supply.
C) The principle of diminishing marginal utility.
D) The substitution effect.
Please select the correct option that best explains Fred's consumption behavior when the price of pork chops decreases.
Answer:
Fred's action of buying fewer pork chops and lamb chops when the price of pork chops decreases, despite no change in income, is consistent with the principle of diminishing marginal utility because the satisfaction derived from each unit of good consumed reduces as its availability increases.
Explanation: Fred's consumption behavior when the price of pork chops decreases can be best explained by the principle of diminishing marginal utility. This principle in economics explains that for a single consumer, the marginal utility of a good or service declines as its availability increases. Reduce the price of a good, even if income has not changed, may result in less pleasure derived from each additional unit consumed, which corresponds with Fred buying fewer pork chops even if prices are lower.
Further, this theory might also explain why he buys fewer lamb chops. One could perceive the two types of chops as substitutes. Given that he derives less satisfaction from additional pork chops due to their price decrease, he may also reduce his consumption of lamb chops, thereby suggesting a kind of substitution effect. However, the clear indication of diminishing marginal utility is a stronger consistency with his behavior.