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ECON 1011 Lecture Notes - Lecture 4: Indifference Curve, Pareto Efficiency, Edgeworth Box

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maroonreindeer65
10 Sep 2018
School
GWU
Department
Economics
Course
ECON 1011
Professor
Steven Suranovic

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ECON 1011 Lecture Notes - Lecture 3: Stop Sign, Inductive Reasoning, Marginal Utility

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ECON 1011 Lecture Notes - Lecture 4: Indifference Curve, Pareto Efficiency, Edgeworth Box

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ECON 1011 Lecture Notes - Lecture 5: Marginal Utility, Perfect Information

Document Summary

Pure exchange model- both people gain benefit from trade, in the context of this model. The assumptions are incorporated and we are assuming the following are true. There are two people in the entire economy (smith, s, and jones, j) There are two homogenous (all the same) goods (apples, a, oranges, o) Smith and jones recieve utility (happiness) from consuming apples and oranges. Smith and jones know their preferences for oranges and apples, meaning they know how much utility they get from any possible bundle of oranges and apples consumed (#o, #a) Smith and jones"s preferences have two characteristics. Diminishing marginal utility in consumption of both goods. The first bite of cake will not be as satisfying, as much utility as the 4th or 5h bite. Smith is endowed (given from the start for whatever reason) with 10 oranges. Smith and jones seek higher utility- they want to be happier. Sometimes well assume smith and jones maximize utility .

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Related Questions

1. Suppose that the total utility from consuming one unit of good X is 54 utils, the total utility of two units of good X is 74 utils, and the total utility of three units of good X is 84 utils. The marginal utility of the third unit is

a.70.67 utils.

b.10 utils.

c.12.25 utils.

d.20 utils.

2. If income rises, the budget constraint

a. Moves outward away from the origin

b. Does not move

c. Moves inward toward the origin

d. Moves farther down the vertical axis

3. Economists assume that the goal of consumers is to maximize total utility.

true/false

4. The budget constraint cuts the horizontal axis at 12 units of good X and it cuts the vertical axis at 20 units of good Y. If the price of good X is $20 and the price of good Y is $12, then what does income equal?

a. $200

b. $240

c. $520

d. $280

e. not enough information to answer this question

5. Consumer equilibrium exists when an individual

a. can be made better off by buying more of a normal good and less of an inferior good.

b. is receiving the same total utility from each of the goods he or she purchases.

c. is receiving the same marginal utility from each of the goods he or she purchases.

d. has the same MU/P ratio for each of the goods he or she purchases.

e. none of the above

6. Suppose you are eating buffalo wings at a local happy hour. The total utils from doing so after the fourth, fifth, sixth, and seventh wings are 30, 50, 65, 72, respectively. In this situation we have __________ marginal utility, which is generally __________ in the analysis of consumer choice.

a. diminishing; not assumed

b. increasing; assumed

c. diminishing; assumed

d. increasing; not assumed

7. Which of the following best describes an interpersonal utility comparison?

a. Usually, Smith seems a lot happier than Jones.

b. Smith gets more utility from working on his computer than Jones gets from working on his computer.

c. Smith usually eats more in a day than Jones eats in a day.

d. ones likes computers produced by Dell Computer Corporation and Smith likes computers produced by Apple Computer Inc

e. Smith got less utility from eating the 30th cookie than eating the 29th cookie, and the same holds for Jones.

8. We would expect the total utility of water to be high but its marginal utility to be low. Why?

a. Because we need water to live and there is so much of it.

b. Because we need water to live and there is very little of it.

c. Because water is a fluid and we don't need fluids to live as much as we need food

d. Because water's price is low.

9.The marginal utility curve for units 6 through 8 of good Z lies below the horizontal axis. What does this imply must be true about the total utility curve for units 6 through 8 of good Z?

a. That portion of good Z’s total utility curve must also lie below the horizontal axis.

b. That portion of good Z’s total utility curve must be upward sloping.

c. That portion of good Z’s total utility curve must be horizontal.

d. That portion of good Z’s total utility curve must be downward sloping.

10. Research presented in the text shows that people are more concerned with their absolute income position in a group than their relative income position in the group.

true/false

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.

(4) Consider the plight of two equally skilled economists, Ann and Bill. Ann lives in Ohio, where she pays a monthly rent of $1000 for a 1000 square foot apartment. Bill lives in Oakland in an 800 square foot apartment that is otherwise identical to Ann’s but which costs him $2000 per month. Assume that the only other good that Ann and Bill consume is food, which costs $10 per unit in Ohio and only $5 per unit in Oakland.

a) Suppose that Ann and Bill both have ordinal utility functions U(h, z) = α log(h) + (1 − α) log(z), with 0 ≤ α ≤ 1, where h is housing services (measured in square feet occupied per month) and z is food. Derive Ann and Bill’s Marshallian Demands for housing 2 and food. Give an interpretation of the parameter α; how does it affect choices between housing services and food?

b) Suppose preferences are as in (a) but with α = 0.25. What are the locally prevailing monthly salaries for economists in Ohio and Oakland?

c) Now suppose that we don’t know what Ann and Bill’s incomes are equal to (though they each know, and also know each others’), and that further we don’t know what the value of α is, and Ann’s α may be different from Bill’s α. Either Ann or Bill could choose to move to the other’s location and get a job as an economist there at the prevailing local salary, yet they choose not to. What can you say about the value of Ann’s α relative to Bill’s α? (Hint: Ann’s indirect utility in Ohio must be greater than her indirect utility would be in Oakland; similarly, Bill must be happier in Oakland than in Ohio.)

d) A pollster surveys a random sample of Ohio residents and Oakland residents, and asks each respondent, “Would you say that you’re (1) Very happy; (2) Pretty happy; or (3) Not so happy?” After tabulating the results, the pollster finds that on average people in Ohio are just as happy as people in California. Noting that the cost of living in Ohio is lower than in California, she argues that many Californians should move to Ohio, where they could be just as happy but spend less money. Comment on the quality of this argument. Are you tempted to move?