Utility and Consumer Choice Topic Index

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Real Per-Capita Disposable Income

A rise in real per-capita income implies that per-capita income rises faster than prices. If preferences do not change, then a rise in real per-capita income will increase consumption. Because of diminishing marginal utility, an increase in consumption will drive down the marginal utility per dollar spent on the last unit consumed.

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Real Per-Capita Disposable Income

In July 2001 President Bush signed into law a $1.35 trillion tax cut that reduced marginal tax rates across the board. The President said that the tax cuts would help boost the economy, which was in recession at the time. The concept of utility and consumer choice is useful in understanding how consumer spending on specific goods and services is affected by an increase in disposable income. The income effect states that an increase in disposable income will result in an increase in the quantity of normal and luxury goods and services purchased. An increase in the quantity of a particular good or service consumed will increase total utility, but the law of diminishing marginal utility tells us that marginal utility falls as the quantity of a particular good or service consumed increases.

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