ECN 101 Chapter Notes - Chapter 7: Indifference Curve, Price Drop, Opportunity Cost

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maroonclam127

28 May 2018

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Chapter 7

ECN 101

Oct 3

Consumer Choice and Utility Maximization - purpose of human life

(how can i maximize my satisfaction?)

Law of diminishing marginal utility - satisfaction declines as a consumer acquires additional

units of a giver product.

It also empowers the law of demand or consumers behave in ways that make demand curves

down sloping.

Durable good - good for a long time use.

Utility is a want satisfying power.

1. Utility and usefulness are not synonymous (Like paintings by Picasso)

2. Utility is subjective (depends on the consumers’ tastes)

3. Utility is difﬁcult to quantify

Utils - units of utility

Total Utility - the total amount of satisfaction or pleasure a person derives from consuming

some speciﬁc quantity.

Marginal Utility - the extra satisfaction a consumer gets from one additional unit of that product.

Summary:

-The law of diminishing marginal utility indicates that gains in satisfaction become smaller as

successive units of a speciﬁc product are consumed.

-Utility is the beneﬁt or satisfaction a person receives from consuming a good or a service.

-Demising marginal utility provides a simple rationale for the law of demand.

Consumer Choice and the Budget Constraint (choosing more or less)

•Rational Behaviour - when consumers try to get use their money income to get the greatest

amount of satisfaction

•Preferences - consumers have a good idea of how much marginal utility they will get from

successive units of the various products they purchase

•Budget Constraints - consumers have limited income

•Prices -

Utility - Maximizing Rule - to maximize satisfaction, consumers should allocate their money

income so that the last dollar spent on each product yields the same amount of extra (marginal)

utility. MU of product A/price of A = MU product B/price of B

Utility Maximization:

-at each step, spend where MU/$ is highest

-In general. if MU/$ is unequal

Consumer equilibrium - is achieved and thus the consumer has no incentive to alter the

expenditure pattern.

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Document Summary

Oct 3 (how can i maximize my satisfaction?) Consumer choice and utility maximization - purpose of human life. Law of diminishing marginal utility - satisfaction declines as a consumer acquires additional units of a giver product. It also empowers the law of demand or consumers behave in ways that make demand curves down sloping. Durable good - good for a long time use. Utility is a want satisfying power: utility and usefulness are not synonymous (like paintings by picasso, utility is subjective (depends on the consumers" tastes, utility is dif cult to quantify. Total utility - the total amount of satisfaction or pleasure a person derives from consuming some speci c quantity. Marginal utility - the extra satisfaction a consumer gets from one additional unit of that product. The law of diminishing marginal utility indicates that gains in satisfaction become smaller as successive units of a speci c product are consumed.

Related Questions

1. If marginal utility is negative, total utility is

a. Positive

b. Negative

c. Decreasing

d. Constant

e. Increasing

2. If utility-maximizing consumers face identical prices, they will have identical

a. Marginal utilities for each good

b. Ratio of marginal utilities for each good

c. Preferences

d. Ratios of total utilities for each good

e. Total utilities for each good

3. The substitution effect

a. Always increases quantity demanded of a good whose relative price has fallen

b. Is opposite in sign to the income effect for all normal goods

c. Is opposite in sign to the income effect for all normal goods

d. May cause demand curves to be upward sloping

e. Is always dominated by the income effect for normal goods

4. Demand curves for normal goods slope downward because

a. The substitution effect of a price change is greater than the income effect

b. Substitution and income effects work in the same direction

c. The income effect is always greater than the substitution effect

d. The income effect is always less than the substitution effect

e. None of the above

5. The idea that a consumer derives less additional satisfaction from consuming successive units of a good is called

a. Diminishing consumer surplus

b. The paradox of value

c. Diminishing marginal utility

d. Diminishing total value of consumption

e. Diminishing total utility

indigolocust149

115. the market demand curve can be considered to be a ___ curve.a) marginal benefit b) marginal cost c) total benefit d) totalcost.

135. Common property resources tend to be ___ through market. a)overpriced b) efficiently priced c) overconsumed. d)underconsumed.

136. the amount by which total utility increases when an additionalunit of a good is consumed is called _____ utility. a) average. b)additional c) maximum d) marginal

137. The utility of a good is determined by how much ___ aparticular consumer obtains from it. a) satisfaction b) usefulness.c) cost d) need fulfillment.

145. Assume that the total utilities corresponding to the firstfive units of a product consumed are 14, 20, 25, 29, 32,respectively. The marginal utility of the thrid unit is
a) 5 b) 6 c) 20 d)25

149. The law of diminishing marginal utility exists for the firstthree units of a good if htey have total utilities of: a) 8, 17,27. b) 9,17, 27. c) 9, 19, 30 d) 10, 19, 27

151. In dealing with utility, we assume that the ability ofconsumers to purchase goods and services is
a) infinite b) irrelevant c) limited d) infinitesimal

152. Which of the following statements is/ are true?
a) consumers are constrained by a budget
b) if a consumer decides to spend more on one good, he or she mustdecide tospend less on another good to satisfy the budgetconstraint.
c) the marginal decision rule states that an activity should beexpanded if its marginal benefit exceeds its marginal cost.
d) all of the above statements are true.

Thank u for ur help

1. Most people would prefer to drive a luxury car that has all the options, but more people buy less expensive cars even though they could afford the luxury car because:

A. luxury cars cost a lot more than non-luxury cars.

B. the total utility of less expensive cars is greater than that of luxury cars.

C. car buyers are irrational.

D. the marginal utility per dollar spent on the less expensive car is higher than that spent on luxury cars.

2. The labor market is considered as one of the more important markets in an economy because

A. most people typically earn the bulk of their income from wages and salaries.

B. the usual market forces do not hold in the labor market.

C. the labor market does not reach an equilibrium.

D. most people are concerned that wages determined in the labor market are unfair.

3. Table 17-1
Quantity of Labor Output (units)
1 80
2 170
3 240
4 300
5 350
6 390
7 420

Refer to Table 17-1. The marginal product of the fourth unit of labor is

A. 300.

B. 75.

C. 60.

D. 15.

4. Carolyn spends her income on popular magazines and music CDs. If the price of a CD is four times the price of a magazine and if Carolyn is maximizing her utility, she buys:

A. both goods until the marginal utility of the last CD purchased is four times the marginal utility of the last magazine purchased.

B. both goods until the marginal utility of the last magazine purchased is four times the marginal utility of the last CD purchased.

C. four times as many magazines as CDs.

D. four times as many CDs as magazines.

5. Marginal utility is the:

A. average satisfaction received from consuming a product.

B. total satisfaction received from consuming a given number of units of a product.

C. extra satisfaction received from consuming one more unit of a product.

D. satisfaction achieved when a consumer has had enough of a product.

6. What is behavioral economics?

A. the study of how people behave in the face of scarcity

B. the study of how people make decisions at the margin

C. the study of situations in which people act in ways that are not economically rational

D. the study of how people make wealth-maximizing decisions

7. Suppose a competitive firm is paying a wage of $12 an hour and sells its product at $3 per unit. Assume that labor is the only input. If hiring another worker would increase output by three units per hour, then to maximize profits the firm should:

A. not hire an additional worker.

B. hire another worker.

C. not change the number of workers it currently hires.

D. There is not enough information to answer the question.

8. Consumers have to make tradeoffs in deciding what to consume because:

A. they are limited by a budget constraint.

B. there are not enough of all goods produced.

C. not all goods give them the same amount of satisfaction.

D. the prices of goods vary.

9. Table 17-1
Quantity of Labor Output (units)
1 80
2 170
3 240
4 300
5 350
6 390
7 420

Refer to Table 17-1. If the output price is $3, what is the marginal revenue product of the fifth unit of labor?

A. $1,050

B. $360

C. $210

D. $150

10. At low wages, the labor supply curve for most people slopes upward because:

A. as wages increase income also increases unless hours worked decrease.

B. the demand for labor is perfectly elastic at low wages.

C. as wages increase the opportunity cost of leisure increases.

D. the supply of labor is perfectly inelastic at low wages.

11. A negative externality exists if:

A. the marginal social cost of producing a good or service exceeds the private cost.

B. the marginal private cost of producing a good or service exceeds the social cost.

C. there are quantity controls in a market.

D. there are price controls in a market.

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ECN 101 Chapter Notes - Chapter 7: Indifference Curve, Price Drop, Opportunity Cost

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