Chapter 24, Problem 3DQ

To determine

Whether the marginal value is equal to the marginal cost? In case of pizza, if toppings are free are you consuming the efficient number of toppings or pizza?

Concept introduction:

Marginal cost:

Marginal cost is defined as the cost that is incurred for every additional unit of the good produced. It is the ratio of change in the total cost and the change in the quantity of the good.

Marginal utility:

Marginal utility is defined as the utility that is obtained for producing every additional unit of the good. It is the ratio of change in the total utility and the change in the quantity of the good.

Explanation:

• If the consumer eats a pizza and has to pay only the price of the crust as the price of the toppings is zero, then the number of pizzas consumed will increase.

• This is because the toppings provide a certain marginal utility to the customer but its marginal cost is zero.

• The quality and the amount of toppings would also rise. The marginal value of the last topping becomes zero. This is because as the consumption of the good increases, its marginal value decreases.

• The marginal value of the last pizza is equal to the marginal cost of the last pizza as both are zero. However, they are not equal in reality because the marginal cost of the last pizza is not zero.

• This proves that an efficient number of pizzas is not consumed.