Question

State how the Law of Diminishing Marginal Utility is important in practice, to various stakeholders (such as consumer, producer, government etc.).

Answer 1

(1) To Consumer: For planning household expenditure. A consumer plans the expenditure according to the utility of a commodity to get maximum satisfaction.
(2) To the Government: It is useful to the Finance Minister in formulating an appropriate tax policy. He can justify progressive tax policy on the grounds that rich people will feel relatively less impact of tax burden as the MU of money is low to them.
(3) To Producer: It acts as a guide to promote sales by reducing prices. At a lower price consumer buys more to equate MU with its price and to maximise TU.
(4) To Monopolist: To practice price discrimination, he can charge higher price to the rich and lower price to poor consumer because MU of money is higher for poor than rich people.
(5) For Welfare Measure: The welfare measure like food, subsidy, free education, etc., for the poor are adopted to promote the welfare. This welfare measures are adopted on the ground that the transfer of money from rich to poor by war of tax will cause more gain to poor.