The marginal decision rule states that an activity should be expanded if its marginal benefit exceeds its marginal cost The marginal benefit of this activity is the utility gained by spending an additional $1 on the good The marginal cost is the utility lost by spending $1 less on another good How much utility is gained by spending another $1 on a good? It is the marginal utility of the good divided by its price The utility gained by spending an additional dollar on good X, for example, is MUX PX This additional utility is the marginal benefit of spending another $1 on the good Suppose that the marginal utility of good X is and that its price is $2 Then an extra $1 spent on X buys additional units of utility (MUX/PX=4/2=2 ) If the marginal utility of good X is and its price is $2, then an extra $1 spent on X buys 0.5 additional units of utility (MUX/PX=1/2=0.5 ) The loss in utility from spending $1 less on another good or service is calculated the same way: as the marginal utility divided by the price The marginal cost to the consumer of spending $1 less on a good is the loss of the additional utility that could have been gained from spending that $1 on the good Suppose a consumer derives more utility by spending an additional $1 on good X rather than on good Y: Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 359