ECO101H1 Lecture Notes - Lecture 10: Budget Constraint, Economic Surplus

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25 Oct 2015

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Total utility = total satisfaction to person from consumption of product. Marginal utility: additional satisfaction (change in total utility) from consumption of one more unit of product. As a person consumes more of a good, the marginal utility of the good declines. Observations: tu increases with additional consumption, mu decreases with additional consumption. Allocate income so that marginal utility of the last unit of each consumed, divided by its price, is the same for all consumed goods. Observations: straightforward to show using calculus (2nd year, motivate with example (1st year) Mu (good 1)/p(good 1)= mu (good 2)/p(good 2)= for all consumed goods. Shows that if consumer is following this rule, it is not possible to obtain a higher level of utility, given the consumer"s budget constraint. Not required to find optimal consumption bundle, given prices, utility and budget (without calculus, this can only be done by trial and error )

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.

tansnake161

1. Due to the law of diminishing marginal utility, _____.

a. the marginal utility curve is upward sloping

b. when marginal utility becomes positive, total utility declines

c. when marginal utility becomes negative, total utility increases

d. marginal utility is zero when total utility is zero

e. the first unit of a product offers more satisfaction than the last unit of the same product

2. True or False. If a product has an elastic demand, it means that consumers are relatively insensitive to a change in the price of the product.

3. If one were to plot the data with utility on the vertical axis and quantity of the good on the horizontal axis:

a. the total utility curve would begin to decline after the second unit of the good.

b. the marginal utility curve would intersect the horizontal axis at the second unit of the good.

c. the total utility curve would rise from the first unit to the fifth unit.

d. the marginal utility curve would intersect the horizontal axis at the third unit of the good.

e. the marginal utility curve would begin to decline after the third unit of the good.

4. If the average variable cost of a firm is falling, then the:

a. marginal cost must be falling.

b. average fixed cost must be rising.

c. marginal cost lies below the average variable cost.

d. marginal cost must be rising.

e. marginal cost lies above the average variable cost.

5. According to economic theory, the difference between the long run and the short run is:

a. the ability for a firm to vary all resources

b. about two years

c. about two months

d. not relevant for executive decision-makers

e. strictly theoretical so that in practice there is no difference between them

jadefly405

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

ECO101H1 Lecture Notes - Lecture 10: Budget Constraint, Economic Surplus

ECO101H1 Full Course Notes

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