Question

Many apartment-complex owners are installing water meters for each apartment and billing the occupants according to the amount of water they use. This is in contrast to the former procedure of having a central meter for the entire complex and dividing up the collective water expense as part of the rent. Where individual meters have been installed, water usage has declined 10 to 40 percent. This decline in water usage has declined 10 to 40 percent. Explain that drop, referring to price and marginal utility.

Answer 1

Answer:

The law of diminishing marginal utility and law of demand explain the decline in water usage by the residents or occupants,in this case.

Explanation:

• In Microeconomic Theory,the law of diminishing marginal utility basically states that as a rational consumer or buyer consumes additional or one more unit of any product or service,the incremental or additional utility or satisfaction obtained from that per unit consumption or purchase decreases progressively.
• Now,law of diminishing marginal utility has a conceptual connection with law of demand,which denotes the inverse or negative relationship between price of any normal good or service and its consumer demand.It implies that as price of any normal good or service increase,its consumer demand decreases and vise versa.
• Now,observe that according to law of diminishing marginal utility,the additional or incremental consumer utility or satisfaction declines for per unit consumption,which essentially implies that the additional or marginal value of any normal product or service that the consumer is willing to pay decreases as he or she increases the consumption level.
• Therefore,the willingness to pay for any consumer decreases progressively as he or she increases consumption level.This also explains that to increase the consumption level of any buyer or consumer,the product or service price has to decrease and vise versa.
• In this case,as the residents use more units of water,the marginal utility or satisfaction obtained by the residents declines increasingly and so does the value they are willing to pay for more water usage.Now,installation of water meters compels the residents to pay for every unit of water they use and since the marginal utility of water drops with each unit of water usage,the price that the residents are willing to pay also drop for each additional unit of water that they use. In other words,the residents don't want to pay more and thus,they restricted their water usage.Therefore,the water usage also declined following the installation of water meter.