Recently,Lisa's wealth increased by $500.If her wealth were to increase by another $500 in the near future,then her utility would increase,but not by as much as it increased with the recent increase to her wealth.Based on this information,Lisa's utility function
A)and marginal utility function are both upward sloping.
B)and marginal utility function are both downward sloping.
C)is upward sloping and her marginal utility function is downward sloping.
D)is downward sloping and her marginal utility function is upward sloping.

Question

Quizplus · Accepted Answer

If Lisa's utility had increased at the same rate with the second $500 increase as it did with the first $500 increase, then her utility function would be linear (i.e., have a constant slope). However, since her utility is increasing at a decreasing rate, her utility function is upward sloping but concave (i.e., the marginal utility function is downward sloping). The law of diminishing marginal utility states that as a consumer consumes more of a good or service, the marginal utility of each additional unit decreases. Therefore, Lisa's marginal utility of wealth is decreasing as her wealth increases.

Recently,Lisa's Wealth Increased by $500