MGEA02H3 Lecture 6: MGEA02 – Lecture six - The demand curve pt.2

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fuchsiamule482

25 Sep 2018

School

UTSC

Department

Economics for Management Studies

Course

MGEA02H3

Professor

John Parkinson

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MGEA02H3 Lecture Notes - Lecture 5: Demand Curve, Economic Surplus

MGEA02H3 Lecture 6: MGEA02 – Lecture six - The demand curve pt.2

MGEA02H3 Lecture Notes - Lecture 7: Tax Incidence, Demand Curve, Bubble Tea

MGEA02 – Lecture 6 – The demand curve part 2

▪ Last week’s agenda:

o Consumer surplus

▪ How to use it and what it is

o Optimal purchase rules (OPR)

o Demand curve

o How the marginal utility and price are connected

▪ Equations

o U (Q) = Utility function

▪ Equation is typically given in a problem

▪ Represents the level of happiness/ satisfaction

▪ Can be linear and non linear

• Linear dominates non linear when Q is small

• Vise versa as Q gets larger

▪ Assume that the consumer is rational

• Will not over consume

• Marginal utility is non- negative

o MU = Marginal utility = dU/dQ

▪ Derived from the utility function

▪ Change in the total utility

• The first derivative of the utility function

• MU cannot be negative but may be 0

o Rational consumer is assumed

o Optimal purchase rule:

▪ P = MU = OPR

▪ P = MU is the optimal

▪ Sets out Q that maximizes the CS

▪ Once this is done, the demand curve is found

▪ P and MU are connected

▪ Total expenditure

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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.

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.

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MGEA02H3 Lecture 6: MGEA02 – Lecture six - The demand curve pt.2

MGEA02H3 Lecture Notes - Lecture 5: Demand Curve, Economic Surplus

MGEA02H3 Lecture 6: MGEA02 – Lecture six - The demand curve pt.2

MGEA02H3 Lecture Notes - Lecture 7: Tax Incidence, Demand Curve, Bubble Tea

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