Question

3. At the local ski resort, the rates for a day on the slopes are as follows:

4-hour pass =$23

Full-day pass (8 hours) =$33

How does this pricing policy relate to what we know about marginal utility?

Answer 1

3. The law of diminishing marginal utility argues that as we increase the consumption of the commodity, the marginal utility it provides diminishes. As can be seen, the amount charged for 4 hours is more than half of the amount charged for full day. The law of diminishing marginal utility takes place there, since the enjoyment (utility) received in first four hours would be relatively much more than the enjoyment one would receive in the second or next four hours. That would mean that the monetary worth (kind of related to opportunity cost) of the first four hours would be more than the next four hours. As can be seen, the first four hours is charged for $23, while the next four hours is charged (relatively) for $10 ($33 for 8 hours minus $23 for four hours). In this way, the pricing policy relates to the theory/law of diminishing marginal utility.