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ECON-221 Lecture Notes - Lecture 12: Cardinal Utility, Substitute Good, Indifference Curve

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School
Diablo Valley College
Department
Economics
Course
ECON-221
Professor
yoon

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Document Summary

Utility is a measure of the satisfaction that a consumer gets from consuming a commodity or a bundle of goods. The marginal utility of a good is the increase in utility that the consumer gets from consuming an additional unit of the good. Most goods are assumed to exhibit diminishing marginal utility ie. the more of a good a consumer already has, the lower the marginal utility derived from the consumption of an additional unit of the commodity. The ordinalists say that utility is not measurable, but is an ordinal magnitude. The consumer need not know in specific units the utility of various commodities to make his choice. It is enough for him to be able to rank the various. Baskets of goods" according to the satisfaction that each bundle gives him. He must be able to determine his order of preference among the different bundles of goods.

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Related Questions

Which of the following statements is correct?

i. utility refers to the satisfaction or fuzzy glow derived from consumption of goods

ii. a good may yield utility when acquired but not be functionally useful

iii. utility and usefulness are synonymous (i.e., they have equivalent meanings)

iv. the marginal utility from consuming an additional unit of a good will be positive, whereas the marginal utility of consuming an additional unit of a bad will be negative

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.

1.

Suppose all consumers are maximizing utility with convex indifference curves. All face the same prices, and are perfectly rational. According to microeconomic models, at the maximization bundle they should

A. All have the same marginal rate of substitution

B. All buy more of the least expensive good

C. All end up with the same bundle of goods

D. All have the same level of satisfaction

2.

Consider an indifference map with food on the vertical axis and shelter on the horizontal axis.

If a consumer is willing to give up 3 units of food in exchange for 1 unit of shelter and food is priced at $5 per unit and shelter at $10 per unit, then the consumer is:

A. Purchasing too much food for utility maximization

B. Purchasing too much shelter for utility maximization

C. Purchasing just the right amount of each good for utility maximization

D. Purchasing less than the budget would allow

3.

If a consumer with convex indifference curves moves along her budget line, closer and closer to the horizontal axis, as she is moving:

A. The marginal utility she gets from good Y declines.

B. The marginal utility she gets from good X declines.

C. The marginal utility she gets from good X increases.

D. The price ratio of the two goods changes.