Log in
HomeClass Notes1,200,000US530,000

ECON-221 Lecture Notes - Lecture 13: Marginal Utility, Budget Constraint, Indifference Curve

18 views2 pages
School
Diablo Valley College
Department
Economics
Course
ECON-221
Professor
yoon

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

The consumer will be at equilibrium when he cannot increase his total utility by reallocating his expenditure. Suppose the consumer was consuming only one commodity x. He can either buy x or retain his money income. The consumer will be at equilibrium when the marginal utility of x is equal to it"s market price (mu = p ). If the marginal utility of x is greater than it"s price, the consumer will increase his welfare by consuming more of x. If marginal utility of x is less than it"s price, the consumer can increase his total satisfaction by cutting down on the amount of x consumed and leaving his income unspent. He maximizes his utility when (mu = p ) If there are more commodities, consumer equilibrium occurs at the point where the ratios of the marginal utilities (mrs) of the individual commodities equals their relative prices. The consumer will increase his total consumption of commodity x.

Get access

Grade+
$40 USD/m
Billed monthly
Grade+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
10 Verified Answers
Class+
$30 USD/m
Billed monthly
Class+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
7 Verified Answers

Related Documents

ECON-221 Lecture Notes - Lecture 22: Marginal Utility, Giffen Good, Marginal Cost
azureprairie-dog22
ECON-221 Lecture Notes - Lecture 27: Marginal Revenue, Marginal Utility, Demand Curve
azureprairie-dog22
ECON-221 Lecture Notes - Lecture 17: Partial Derivative, Indifference Curve, Utility
coppermule660

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.

When deciding consumption levels of more than one good, the utility-maximizing rule states that you are maximizing utility when

the marginal utility o two goods are equal

the marginal utility of two goods are zero

the ratio of marginal utility to price of two goods is zero

the ratio of marginal utility to price for the two goods are equal

10 points

QUESTION 2

My brother says the law of diminishing marginal utility is nonsense because he is way happier after his sixth beer than after his first one. Pick the best response.

He has a point, maybe this is something behavioral economists should take a look at.

True, but marginal utility refers only to the utility gained (or lost) by drinking that last beer, not to his total utility

There are always exceptions, but in general this law will hold.

True, but the law of diminishing marginal utility is really just saying that eventually he will prefer a glass of wine to another beer.

10 points

QUESTION 3

Frank spends $75 on 10 magazines and 25 newspapers. The magazines cost $5 each and the newspapers cost $2.50 each. Suppose that his marginal utility from the final magazine is 10 utils while his marginal utility from the final newspaper is also 10 utils. According to the utility-maximizing rule, Frank should:

Reallocate spending from magazines to newspapers

Reallocate spending from newspapers to magazines

Be satisfied because he is already maximizing his total utility

None of the above

10 points

QUESTION 4

Marginal utility can be:

Positive, negative, or zero

Decreasing but not negative

Positive or negative, but not zero

Positive, but not negative

10 points

QUESTION 5

In economics, a product provides utility if it:

is useful

violates the law of demand

takes more and more resources to produce successive units of it

satisfies consumer wants

Which of the following is true of an indifference curve?

Along an indifference curve utility is fixed.

If a consumer is rational then indifference curves may cross.

Indifference curves further from the origin are associated with lower levels of utility than those that are closer to the origin.

Because they are indifference curves, microeconomics students should be indifferent towards them.

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