Utility Maximization

Posted in Marketing and Strategy Terms, Total Reads: 631
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Definition: Utility Maximization

Utility maximization problem deals with the confusion people face in spending their money to maximize the utility for the money they spend. When a customer makes a purchase decision, he/she tries to get the maximum possible value for the least amount of money.


Customers always have scarce resources irrespective of their property. They always try to get the maximum for the money they spend. So when they choose the products or service s they evaluate the utility they get from the product / service. They compare the value for this purchase with all the other ways they could have spent it and compare the value. They consider the opportunity costs for this purchase.


Utility Maximizing Rule states that a consumer's utility received by the customer from the last dollar spent on different commodities is equal for all the products and services. The question then becomes how to spend the money they have to maximize their utility. The consumer will plan and determine the amount of goods and services to purchase assuming a fixed income. The expectation is that the consumer creates a bundle of goods and services that best satisfies the needs and wants within the fixed income.

 

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