giving up those dollars is just like paying

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CathrineW

Senior Member
n/a
n/a
Hi!
The source is "Microeconomics" by Hal. R.Varian

One sentence does not make sense to me at all.

But giving up those dollars is just like paying dollars in order to consume a little more of good 1.

The context:

If good 2 represents the consumption of “all other goods,” and it is measured in dollars that you can spend on other goods, then the marginal-willingness-to-pay interpretation is very natural. The marginal rate of substitution of good 2 for good 1 is how many dollars you would just be willing to give up spending on other goods in order to consume a little bit more of good 1. Thus the MRS measures the marginal willingness to give up dollars in order to consume a small amount more of good 1. But giving up those dollars is just like paying dollars in order to consume a little more of good 1.

My opinion:

A man gives up spending dollars on good 2 because he wants to consume a little bit more of good 1. So the man saves these dollars and consumes good 1, otherwise he would have to spend extra dollars and buy more good 2 (instead of some extra amount of good 1) which he does not like.
But this last sentence puzzles me. Why does it mean that he pays dollars for the good 1? Doesn't he save money? What does it mean?
 
  • wandle

    Senior Member
    English - British
    'Good 2' is an abstract concept, representing the consumption of “all other goods,” and measured in dollars. Thus if we say good 2 is $100, that means that normally the individual spends $100 for all other purchases besides good 1. If we say the MRS is $5, that means the individual has chosen to give up $5 worth of other goods in order to gain an additional $5 worth of good 1. I suppose this substitution need not in theory involve cash expenditure.
    But giving up those dollars is just like paying dollars in order to consume a little more of good 1.
    The point of this sentence seems to be that even if no cash expenditure is involved, the effect is nevertheless equivalent to cash expenditure.
     

    morior_invictus

    Senior Member
    Slovak
    I agree with wandle.

    "marginal willingness to pay" refers to the amount that a consumer is willing to pay for an additional (extra) unit of a particular commodity which is worth the sacrifice of all other things that could be purchased for that amount. The degree of willingness is based on the consumer's perception of the offering's value.

    Let's say that I really enjoy sledding. One day of sledding costs, for instance, $15 but since I really love that activity, I was willing to buy additional 5 days of sledding (I practically won't go home) for the amount $75, and sacrifice all other things I could have purchased with $75 (e.g. this "chic" shapka-ushanka).
    I suppose this substitution need not in theory involve cash expenditure.
    :thumbsup:
     
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