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ECON 040 Lecture Notes - Lecture 13: Marginal Utility, Marginal Cost, Reservation Price

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blackpig616
10 Aug 2020
School
College of The Sequoias
Department
Economics (ECON)
Course
ECON 040
Professor
Tootle

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Document Summary

Utility represents the satisfaction that an individual derives from consuming a given good or taking a certain action. Measured in utils per unit of time. Decreasing marginal utility the utility from consuming an extra unit of a given good decreases with the number of units that have been previously consumed. Progressively decreases, eventually going negative (decreasing marginal utility) 1 unit of other goods brings 1 util (constant) Price (pcans) = and pother-goods = . If marginal benefit (utility) marginal cost (satisfaction), take the action. If marginal benefit (utility) < marginal cost (satisfaction), don"t take the action. Law of demand tendency for consumer to demand more of a certain good or service when the price of that good or service decreases. And vice versa, demand goes down when price goes up. Substitution effect: other goods became cheaper (relative to the price of soda) than before and so isa decided to consume more of them.

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Related Questions

1. Economists use ____________ as a measure of the relative level of satisfaction when someone consumes a good or service.

  consumer happiness
  utility
  a happiness index
  a satisfaction index

2. Sue likes brownies. However, Sue notices that the more brownies she eats the less satisfaction she receives from each extra brownie. We can say that Sue is experiencing ___________________ from each extra brownie.

  sugar sickness
  total utility
  diminishing marginal utility
  increasing marginal utility

3. When total utility is maximized, the marginal utility will be

  positive.
  zero.
  negative.
  none of these.

4. Consider Dirk and Lee. They are both eating pizza. Which of the following statements is true regarding their satisfaction and utility?

  Dirk and Lee both receive 10 utils from eating pizza.
  Dirk and Lee both receive the same level of satisfaction from eating pizza.
  Dirk gets more twice as much satisfaction as Lee from eating pizza.
  It is difficult to determine because the utility is subjective.

5. For many products, the total utility curve is

  strictly increasing because of increasing marginal utility.
  strictly decreasing because of diminishing marginal utility.
  increasing initially because of increasing marginal utility, but eventually decreases.
  increasing initially at a decreasing rate because of diminishing marginal utility but eventually decreases.

6. When consumers get the biggest bang for the buck, we say they

  used the loudest gun in hunting season.
  reached a consumer optimum.
  minimized consumer satisfaction.
  maximized marginal utility.

7. By choosing to consume at the consumer optimum, consumers will

  maximize their total utility.
  minimize their total utility.
  maximize the amount they spend on each good.
 

minimize the amount they spend on each good.

8. A consumer is in equilibrium when consuming two goods when which of the following holds?

  MUa/ Pa = MUb/ Pb
  MUa/ Ph =MUb/ Pa
  Pa/ MUa = Pb/ MUb
  MUa x Pa = MUbxPb

9. If the marginal utility of good 1 is 15 and its price is $3, and the marginal utility of good 2 is 12, and its price is $4, then the consumer

  has achieved a consumer optimum.
  should increase his or her consumption of good 1.
  should increase his or her consumption of good 2.
  should decrease his or her consumption of good 1.

10.Suppose the price of an iPod decrease and the price of HD TVs remains the same; what noticeable effect(s) occur(s)?

  the substitution effect only
  the real-income effect only
  the substitution effect and real-income effect, if there is a noticeable change in purchasing power
  the substitution effect and real-income effect, if there isn’t a noticeable change in purchasing power

11. The ______________ paradox was described by Adam Smith in 1776.

  diamond-carbon
  diamond-water
  diamond-life
  water-utility

12. What is the key to solving the diamond-water paradox?

  more water and fewer diamonds
  marginal utility
  total utility
  consumer demand

13. When solving the diamond-water paradox we notice that the marginal utility of

  diamonds are equal to the marginal utility of water.
  diamonds are greater than the marginal utility of water.
  diamonds are less than the marginal utility of water.
  water is equal to its price, and therefore lower than the marginal utility of diamonds.

14. The consumer surplus for water is

  greater than that for diamonds because water is nonessential.
  greater than that for diamonds because water is essential.
  less than that for diamonds because water is nonessential.
  less than that for diamonds because water is essential.

15. Suppose a consumer consumes only diamonds and water, and the price of diamonds increases. All else being equal, a consumer’s marginal utility for diamonds

  decreases and the marginal utility for water stays the same.
  increases and the marginal utility for water decreases.
  decreases and the marginal utility for water increases.
  increases and the marginal utility for water stays the same.

budget line

marginal utility

complete property of preferences

market demand

consumption bundle

substitution effect

Giffen good

total effect

income effect

transitive property of preferences

indifference curves

utility

the marginal rate of substitution

utility function

 

1.

_____

The satisfaction or benefit that consumers receive from consuming goods or services.

 

 

2.

________________ _

A particular combination of specific quantities of goods or services

3.

________________ _

Consumers can rank all conceivable bundles of goods or services

4.

_____

If A is preferred to B, and B is preferred to C, then A is always preferred to C.

5.

_____

Equation showing a consumer’s perception of the total utility forthcoming from consuming each bundle of goods and services.

6.

_____

A set of consumption bundles each and every one of which provides a consumer with exactly the same level of total utility.

7.

_____

The number of units of Y that must be given up for total utility to remain the same when one more unit of X is consumed.

8.

_____

The addition to total utility attributable to consuming one more unit of a good, holding the consumption of all other goods constant.

9.

_____

The line showing all bundles of goods that can be purchased at given prices if the entire income is spent.

10.

_____

The change in the consumption of a good that would result if the consumer remained on the original indifference curve after the price of the good changes.

11.

_____

The change in consumption of goods results strictly from the change in purchasing power after the price of a good changes.

12.

________________ _

The sum of the substitution and income effects.

13.

_____

A good for which quantity demanded varies directly with price, causing an upward sloping demand curve.

14.

_____

A list of prices and the corresponding quantity consumers are willing and able to purchase at each price.

Multiple Choice:

1. If 8 percent increase in the price of one good results in an increase of 4 percent in the quantity

demanded of another good, then it can be concluded that the two goods are:

a) complements.

b) substitutes.

c) independent.

d) normal.

2. The law of diminishing marginal utility explains why:

a) supply curves are upsloping.

b) demand curves are downsloping.

c) real income of the consumer rises when the price of a commodity falls.

d) substitution effect is always higher than income effect mentioned in c) above.

3. A necessary and sufficient condition for a rational consumer to be in equilibrium or at that position where he

maximizes utility is that the marginal utility:

a) of all products he consumes is zero.

b) of all products he consumes is positive.

c) is the same for all products.

d) per last dollar is the same for products consumed.

4. Diminishing returns are observed in increases of production output by adding a variable input to a fixed of

inputs because:

a) the ability or quality of the variable input added decreases are more is used.

b) the firm must lower the price of its product when it produces more units of output.

c) the per unit cost it must pay for the variable input increases as more of the input is used.

d) as more variable input is used, the amount of fixed input per variable input decreases.

5. A necessary and sufficient condition for a rational consumer to be in equilibrium or at that position where he

maximizes utility as he spends the last dollar of his budget is that the marginal utility:

e) of all products he consumes is zero.

f) of all products he consumes is positive.

g) is the same for all products.

h) per dollar for all products is the same.

6. The short run marginal cost (MC) curve eventually rises because of:

a) diseconomies of scale.

b) decreasing per unit fixed costs.

c) diminishing marginal returns.

d) increasing marginal productivity of the variable input.

7. Other things being equal, if the prices of a firm