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ECN 104 Lecture Notes - Lecture 8: Marginal Utility, Demand Curve

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School
Ryerson University
Department
Economics
Course
ECN 104
Professor
Teresa Fung

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Document Summary

The benefit or satisfaction form the consumption of goods and services. Marginal utility: extra satisfaction from consuming one more unit. Total utility depends on the level of consumption: more consumption generally gives more total utility (up to certain limit) Marginal utility is usually positive, but it diminishes as the quantity consumed increases. Gains in satisfaction decline as additional units are consumed. A consumer exhibits rational behaviour when he/she wants to get the most out of his/her money: to maximize the total utility from the goods/services consumed consumers know clear-cut preferences. A consumer equilibrium is a situation in which a consumer has allocated all of his or her available income in the way that maximizes his or her total utility, given the prices of goods and services.

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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.

Ā  consumer happiness
Ā  utility
Ā  a happiness index
Ā  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.

Ā  sugar sickness
Ā  total utility
Ā  diminishing marginal utility
Ā  increasing marginal utility

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

Ā  positive.
Ā  zero.
Ā  negative.
Ā  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?

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

5. For many products, the total utility curve is

Ā  strictly increasing because of increasing marginal utility.
Ā  strictly decreasing because of diminishing marginal utility.
Ā  increasing initially because of increasing marginal utility, but eventually decreases.
Ā  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

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

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

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

minimize the amount they spend on each good.

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

Ā  MUa/ Pa = MUb/ Pb
Ā  MUa/ Ph =MUb/ Pa
Ā  Pa/ MUa = Pb/ MUb
Ā  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

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

Ā  the substitution effect only
Ā  the real-income effect only
Ā  the substitution effect and real-income effect, if there is a noticeable change in purchasing power
Ā  the substitution effect and real-income effect, if there isnĆ¢Ā€Ā™t a noticeable change in purchasing power

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

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

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

Ā  more water and fewer diamonds
Ā  marginal utility
Ā  total utility
Ā  consumer demand

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

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

14. The consumer surplus for water is

Ā  greater than that for diamonds because water is nonessential.
Ā  greater than that for diamonds because water is essential.
Ā  less than that for diamonds because water is nonessential.
Ā  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 consumerĆ¢Ā€Ā™s marginal utility for diamonds

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

3. Amy is shopping at a dollar store. She is currently buying 5 bracelets that cost $1 each and 4 sodas that cost $1 each. The table below indicates the marginal utility she obtains when she purchases this combination.

Quantity

Price per Unit

MU per unit

Bracelets

5

$1

30

Sodas

4

$1

40

A consumer maximizes utility when the last dollar spent on any good generates the same satisfaction as the last dollar spent on every other good. Is this consumer maximizing her utility?

If not, should she consume more bracelets or more sodas? Explain.

Answer the following assuming that one more bracelet is purchased and one less soda is consumed:

Recall the law of diminishing marginal utility. What happens to the Marginal Utility of bracelets and the Marginal Utility of soda?

What happens to the Total Utility received?

What happens to the total dollars spent?

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