ECON 101 Lecture Notes - Lecture 12: Marginal Utility, Giffen Good, Loss Aversion
ECON 101 Full Course Notes
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budget line
marginal utility
complete property of preferences
market demand
consumption bundle
substitution effect
Giffen good
total effect
income effect
transitive property of preferences
indifference curves
utility
the marginal rate of substitution
utility function
Ā
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1. |
_____ |
The satisfaction or benefit that consumers receive from consuming goods or services. Ā Ā |
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2. |
________________ _ |
A particular combination of specific quantities of goods or services |
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3. |
________________ _ |
Consumers can rank all conceivable bundles of goods or services |
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4. |
_____ |
If A is preferred to B, and B is preferred to C, then A is always preferred to C. |
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5. |
_____ |
Equation showing a consumerĆ¢ĀĀs perception of the total utility forthcoming from consuming each bundle of goods and services. |
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6. |
_____ |
A set of consumption bundles each and every one of which provides a consumer with exactly the same level of total utility. |
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7. |
_____ |
The number of units of Y that must be given up for total utility to remain the same when one more unit of X is consumed. |
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8. |
_____ |
The addition to total utility attributable to consuming one more unit of a good, holding the consumption of all other goods constant. |
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9. |
_____ |
The line showing all bundles of goods that can be purchased at given prices if the entire income is spent. |
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10. |
_____ |
The change in the consumption of a good that would result if the consumer remained on the original indifference curve after the price of the good changes. |
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11. |
_____ |
The change in consumption of goods results strictly from the change in purchasing power after the price of a good changes. |
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12. |
________________ _ |
The sum of the substitution and income effects. |
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13. |
_____ |
A good for which quantity demanded varies directly with price, causing an upward sloping demand curve. |
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14. |
_____ |
A list of prices and the corresponding quantity consumers are willing and able to purchase at each price. |
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¢ĀĀt 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¢ĀĀs 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. Use the table below for the following question. Suppose you have a budget of $6 and that brownies and Twizzlers cost $1 each. What is the consumer optimum?
|
Number of Brownies |
Total Utility of Brownies |
Marginal Utility of Brownies |
Number of Twizzlers |
Total Utility of Twizzlers |
Marginal Utility of Twizzlers |
|
0 |
0 |
- |
0 |
0 |
- |
|
1 |
10 |
10 |
1 |
6 |
8 |
|
2 |
19 |
9 |
2 |
13 |
7 |
|
3 |
26 |
7 |
3 |
19 |
6 |
|
4 |
30 |
4 |
4 |
23 |
4 |
|
5 |
30 |
0 |
5 |
25 |
2 |
|
6 |
29 |
-1 |
6 |
25 |
0 |
| Ā | 6 brownies |
| Ā | 3 brownies and 3 Twizzlers |
| Ā | 4 brownies and 2 Twizzlers |
| Ā | any combination of 6 because they're both $1 |
| Ā | 8 |
2. Use the table below for the following question. What is the consumer equilibrium for a $6 budget if the price of brownies rises to $1.50 and the price of Twizzlers remains at $1.00?
|
Number of Brownies |
Total Utility of Brownies |
Marginal Utility of Brownies |
Number of Twizzlers |
Total Utility of Twizzlers |
Marginal Utility of Twizzlers |
|
0 |
0 |
- |
0 |
0 |
- |
|
1 |
10 |
10 |
1 |
6 |
8 |
|
2 |
19 |
9 |
2 |
13 |
7 |
|
3 |
26 |
7 |
3 |
19 |
6 |
|
4 |
30 |
4 |
4 |
23 |
4 |
|
5 |
30 |
0 |
5 |
25 |
2 |
|
6 |
29 |
-1 |
6 |
25 |
0 |
| Ā | The consumer will buy all Twizzlers because they're cheaper. |
| Ā | 4 brownies |
| Ā | 3 Twizzlers and 2 brownies |
| Ā | 3 brownies and 3 Twizzlers |
| Ā | 7 |
3. At Nice Price for the Ice, an ice cream parlor, customers routinely buy a scoop of ice cream for $3. If consumers purchase one scoop of ice cream at $3, then why don't they keep buying more and more scoops for $3 until the store sells out?
| Ā | People would not want more than one scoop of ice cream because then they would have less money to spend on other goods. |
| Ā | People do not want to consume all the scoops of ice cream because their total utility is higher the less they eat. |
| Ā | At some point, customers do not value an additional scoop at $3, so they will not pay $3 for a scoop after they reach that point. |
4. Suppose you plan on eating 50 potato chips. As you start consuming potato chips, your marginal utility is very high, but it begins to fall slowly until you've eaten 10 chips. After you have eaten 10 chips, your marginal utility decreases even faster with each additional chip. The marginal utility continues to decline until you've eaten 49 chips. The fiftieth chip does not give you any additional utility. After 50 chips, your mouth gets so salty that it's unpleasant to eat anymore, so marginal utility is actually negative for those chips. How many chips should you eat in order to maximize your total utility?
| Ā | 1 |
| Ā | 10 |
| Ā | 49 |
5. As you start consuming potato chips, your marginal utility is very high, but it begins to fall slowly until you've eaten 10 chips. After you have eaten 10 chips, marginal utility decreases even faster with each additional chip. The marginal utility continues to decline until you've eaten 49 chips. The fiftieth chip does not give you any additional utility. After 50 chips, your mouth gets so salty that it's unpleasant to eat anymore, so marginal utility is actually negative for those chips. How many chips should you eat in order to maximize your marginal utility?
| Ā | 1 |
| Ā | 10 |
| Ā | 49 |
| Ā | 50 |
6. At current levels of consumption, Alice is spending her entire budget. If Alice gets 3 utils of satisfaction per dollar spent on ice cream and 2 utils per dollar spent on shampoo, then how should she adjust her consumption to get closer to the consumer optimum?
| Ā | She is already at the consumer optimum, so no adjustment is necessary. |
| Ā | She should buy more ice cream and less shampoo. |
| Ā | She should buy more shampoo and less ice cream. |
| Ā | She should buy more of both goods. |
7. Suppose you are at a restaurant and your favorite dish costs $20. You can get your next-favorite dish for $17. If your next-favorite dish gives you 100 utils, how many additional utils do you need from your favorite dish to spend the extra $3?
| Ā | 15 |
| Ā | 17.65 |
| Ā | 85 |
| Ā | 117.65 |
8. The diamond water paradox is the observation that water is essential to life and inexpensive, while diamonds are not essential and are highly-priced. Which of the other pairs of goods exhibit a pricing structure similar to water and diamonds?
| Ā | economy & luxury cars |
| Ā | rice & truffles (very expensive mushrooms) |
| Ā | paper clips & gasoline |
| Ā | paper & textbooks |
9. Rice is a cheap staple food eaten several times a day by many people all over the world. In Trufflelandia, residents also eat expensive mushrooms known as truffles once every year as a birthday celebration. Rice keeps the people alive and truffles are not necessary for sustaining their lives. Why is rice so cheap and truffles so expensive?
| Ā | Truffles taste better, so they are worth more money. |
| Ā | Rice is easy to cook, so people buy a lot of it. If people are going to buy so much, then it has to be cheap. |
| Ā | Truffles are more nutritious, and healthy food is always more expensive than unhealthy food. |
| Ā | People eat so much rice that an additional serving of rice has little marginal value, but the marginal value of another serving of truffles is very high. |
