ECN 104 Lecture Notes - Lecture 8: Budget Constraint, Demand Curve, Utility

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orangeduck972

15 Dec 2015

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In this chapter, we will show how to analyze the decisions of a rational consumer. We will begin by showing how the concept of utility a measure of consumer satisfaction allows us to begin thinking about rational consumer choice. We will then look at how budget constraints determine what a consumer can buy and how marginal analysis can be used to determine the consumption choice that maximizes utility. Finally, we will see how this analysis can be used to understand the law of demand and why the demand curve slopes downward. All that is required to analyze consumer behaviour is to suppose that each individual is trying to maximize some personal measure of the satisfaction gained from consumption of goods and services. That measure is known as the consumer"s utility. The set of all the goods and services an individual consumes is known as the individual"s consumption bundle.

Related Questions

Chapter 4 is entitled 'The Theory of Individual Behavior', and much of the chapter is devoted to the use of indifference analysis to build a framework for demand theory. Indifference analysis goes to great lengths to explain consumer behavior and how consumers make choices between options available to them. The options they face include budget constraints, different preferences for risk, and a multitude of products and services from which to choose. If one steps back and looks at consumer behavior, it seems to be based upon a premise that is not actually stated in our book. That premise is that consumers behave rationally in their consumption expenditures.

Do you believe consumers do behave rationally? Is so, how do you explain impulse buying, buying as a result of advertising or strong sales pitches, buying for purposes of conspicuous consumption, or buying to simply have something bigger and better than someone else? If consumers do not behave rationally, how can the theory in chapter 4 account for the above behavior? Is the theory still valid? If you think consumers do behave rationally, how can rational thinking explain the above behaviors? How do your thoughts impact, if at all, your opinion of the theory espoused in our text?

coffeelouse766

In this assignment, you will apply consumer choice theory and marginal analysis to business problems.

Consider each of the following products and services:

a pair of tickets to a sporting or cultural event that you enjoy

a can of common table salt

a college class

In a two-page essay:

Suppose your household budget was suddenly doubled because you received a 100% raise. How would your consumption of each of these goods and services change? Explain your answer in terms of utility and marginal analysis.

What is the law of diminishing marginal utility? How does this law affect the ability of table salt companies to stimulate demand for their product?

orangehamster799

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

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

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?

MU_a/ P_a = MU_b/ P_b

MU_a/ P_h =MU_b/ P_a

P_a/ MU_a = P_b/ MU_b

MU_a x P_a = MU_bxP_b

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 isnât a noticeable change in purchasing power

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

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 consumerâs 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.

tansnake161

ECN 104 Lecture Notes - Lecture 8: Budget Constraint, Demand Curve, Utility

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