Recognizing Marginal UtilitySeptember 29, 2011 Posted by: Joe Morgan, CFA
Though some 27 years old, the term "foodie" is being heard more and more recently. The term refers to people who love food and seek out interesting and new places to indulge this passion. In the last year after moving into our new offices, our asset management team developed quite a few foodies due to the improved dining choices in our new location. But even foodies can get too much.
The so-called "law of diminishing marginal utility" tells us that increasing the consumption of one product while retaining constant consumption of other products creates a decline in the marginal utility derived from each additional unit.
At times, I enjoy chocolate with a glass of wine after dinner. Each additional piece of chocolate, however, is not as satisfying as the first. When I reach for the next piece, thoughts of the downside of such indulgence grow and eventually offset the pleasure of consuming it. The Fed is now experiencing something similar.
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