ECON201 Study Guide - Midterm Guide: Utility, Marginal Utility

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azuregerbil201

10 Jan 2016

School

University of Waterloo

Department

Economics

Course

ECON201

Professor

Richard Ennis

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ECON201 Full Course Notes

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Give an example of preferences (i. e. , a ranking of baskets) that do not satisfy the assumption that preferences are transitive. Adam consumes two goods: housing and food: suppose we are given adam"s marginal utility of housing and his marginal utility of food at the basket he currently consumes. Can we determine his marginal rate of substitution of housing for food at that basket: suppose we are given adam"s marginal rate of substitution of housing for food at the basket he currently consumes. Bill has a utility function over food and gasoline with the equation u = x2y, where x measures the quantity of food consumed and y measures the quantity of gasoline. Show that a consumer with this utility function believes that more is better for each good. Consider the single-good utility function u(x) = 3x2. Plot the utility and marginal utility functions on two separate graphs.

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

(4) Consider the plight of two equally skilled economists, Ann and Bill. Ann lives in Ohio, where she pays a monthly rent of $1000 for a 1000 square foot apartment. Bill lives in Oakland in an 800 square foot apartment that is otherwise identical to Annâs but which costs him $2000 per month. Assume that the only other good that Ann and Bill consume is food, which costs $10 per unit in Ohio and only $5 per unit in Oakland.

a) Suppose that Ann and Bill both have ordinal utility functions U(h, z) = Î± log(h) + (1 â Î±) log(z), with 0 â¤ Î± â¤ 1, where h is housing services (measured in square feet occupied per month) and z is food. Derive Ann and Billâs Marshallian Demands for housing 2 and food. Give an interpretation of the parameter Î±; how does it affect choices between housing services and food?

b) Suppose preferences are as in (a) but with Î± = 0.25. What are the locally prevailing monthly salaries for economists in Ohio and Oakland?

c) Now suppose that we donât know what Ann and Billâs incomes are equal to (though they each know, and also know each othersâ), and that further we donât know what the value of Î± is, and Annâs Î± may be different from Billâs Î±. Either Ann or Bill could choose to move to the otherâs location and get a job as an economist there at the prevailing local salary, yet they choose not to. What can you say about the value of Annâs Î± relative to Billâs Î±? (Hint: Annâs indirect utility in Ohio must be greater than her indirect utility would be in Oakland; similarly, Bill must be happier in Oakland than in Ohio.)

d) A pollster surveys a random sample of Ohio residents and Oakland residents, and asks each respondent, âWould you say that youâre (1) Very happy; (2) Pretty happy; or (3) Not so happy?â After tabulating the results, the pollster finds that on average people in Ohio are just as happy as people in California. Noting that the cost of living in Ohio is lower than in California, she argues that many Californians should move to Ohio, where they could be just as happy but spend less money. Comment on the quality of this argument. Are you tempted to move?

taupegiraffe572

1. Suppose that the total utility from consuming one unit of good X is 54 utils, the total utility of two units of good X is 74 utils, and the total utility of three units of good X is 84 utils. The marginal utility of the third unit is

a.70.67 utils.

b.10 utils.

c.12.25 utils.

d.20 utils.

2. If income rises, the budget constraint

a. Moves outward away from the origin

b. Does not move

c. Moves inward toward the origin

d. Moves farther down the vertical axis

3. Economists assume that the goal of consumers is to maximize total utility.

true/false

4. The budget constraint cuts the horizontal axis at 12 units of good X and it cuts the vertical axis at 20 units of good Y. If the price of good X is $20 and the price of good Y is $12, then what does income equal?

a. $200

b. $240

c. $520

d. $280

e. not enough information to answer this question

5. Consumer equilibrium exists when an individual

a. can be made better off by buying more of a normal good and less of an inferior good.

b. is receiving the same total utility from each of the goods he or she purchases.

c. is receiving the same marginal utility from each of the goods he or she purchases.

d. has the same MU/P ratio for each of the goods he or she purchases.

e. none of the above

6. Suppose you are eating buffalo wings at a local happy hour. The total utils from doing so after the fourth, fifth, sixth, and seventh wings are 30, 50, 65, 72, respectively. In this situation we have __________ marginal utility, which is generally __________ in the analysis of consumer choice.

a. diminishing; not assumed

b. increasing; assumed

c. diminishing; assumed

d. increasing; not assumed

7. Which of the following best describes an interpersonal utility comparison?

a. Usually, Smith seems a lot happier than Jones.

b. Smith gets more utility from working on his computer than Jones gets from working on his computer.

c. Smith usually eats more in a day than Jones eats in a day.

d. ones likes computers produced by Dell Computer Corporation and Smith likes computers produced by Apple Computer Inc

e. Smith got less utility from eating the 30th cookie than eating the 29th cookie, and the same holds for Jones.

8. We would expect the total utility of water to be high but its marginal utility to be low. Why?

a. Because we need water to live and there is so much of it.

b. Because we need water to live and there is very little of it.

c. Because water is a fluid and we don't need fluids to live as much as we need food

d. Because water's price is low.

9.The marginal utility curve for units 6 through 8 of good Z lies below the horizontal axis. What does this imply must be true about the total utility curve for units 6 through 8 of good Z?

a. That portion of good Zâs total utility curve must also lie below the horizontal axis.

b. That portion of good Zâs total utility curve must be upward sloping.

c. That portion of good Zâs total utility curve must be horizontal.

d. That portion of good Zâs total utility curve must be downward sloping.

10. Research presented in the text shows that people are more concerned with their absolute income position in a group than their relative income position in the group.

true/false

ECON201 Study Guide - Midterm Guide: Utility, Marginal Utility

ECON201 Full Course Notes

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