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ECON 208 Chapter Notes - Chapter 6: Ceteris Paribus, Demand Curve, Utility

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School
McGill University
Department
Economics
Course
ECON 208
Professor
Alex Hale

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ECON 208 Full Course Notes
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ECON 208 Full Course Notes
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Document Summary

Consumers are motivated to maximize their utility. Example very little money would be needed to induce you to reduce your consumption of water by one litre per week. A lot of money would be needed to induce you to reduce your consumption of water to one liter per week. We make an important assumption to be able to compare total and marginal utility: individuals know the utility from different actions individuals can compare the utility from different actions. Total utility, marginal utility, and demand curve: shape of the marginal utility = shape of the demand curve, marginal utility is the slope of the total utility function. Market demand curves the theory of consumer behaviour predicts a negatively sloped market demand curve in addition to a negatively sloped demand curve for each individual. Consumers must decide how to adjust their expenditure to maximize total utility: assume two goods, x and y:

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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.

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. If marginal utility is negative, total utility is

a. Positive

b. Negative

c. Decreasing

d. Constant

e. Increasing

2. If utility-maximizing consumers face identical prices, they will have identical

a. Marginal utilities for each good

b. Ratio of marginal utilities for each good

c. Preferences

d. Ratios of total utilities for each good

e. Total utilities for each good

3. The substitution effect

a. Always increases quantity demanded of a good whose relative price has fallen

b. Is opposite in sign to the income effect for all normal goods

c. Is opposite in sign to the income effect for all normal goods

d. May cause demand curves to be upward sloping

e. Is always dominated by the income effect for normal goods

4. Demand curves for normal goods slope downward because

a. The substitution effect of a price change is greater than the income effect

b. Substitution and income effects work in the same direction

c. The income effect is always greater than the substitution effect

d. The income effect is always less than the substitution effect

e. None of the above

5. The idea that a consumer derives less additional satisfaction from consuming successive units of a good is called

a. Diminishing consumer surplus

b. The paradox of value

c. Diminishing marginal utility

d. Diminishing total value of consumption

e. Diminishing total utility

When deciding consumption levels of more than one good, the utility-maximizing rule states that you are maximizing utility when

the marginal utility o two goods are equal

the marginal utility of two goods are zero

the ratio of marginal utility to price of two goods is zero

the ratio of marginal utility to price for the two goods are equal

10 points

QUESTION 2

My brother says the law of diminishing marginal utility is nonsense because he is way happier after his sixth beer than after his first one. Pick the best response.

He has a point, maybe this is something behavioral economists should take a look at.

True, but marginal utility refers only to the utility gained (or lost) by drinking that last beer, not to his total utility

There are always exceptions, but in general this law will hold.

True, but the law of diminishing marginal utility is really just saying that eventually he will prefer a glass of wine to another beer.

10 points

QUESTION 3

Frank spends $75 on 10 magazines and 25 newspapers. The magazines cost $5 each and the newspapers cost $2.50 each. Suppose that his marginal utility from the final magazine is 10 utils while his marginal utility from the final newspaper is also 10 utils. According to the utility-maximizing rule, Frank should:

Reallocate spending from magazines to newspapers

Reallocate spending from newspapers to magazines

Be satisfied because he is already maximizing his total utility

None of the above

10 points

QUESTION 4

Marginal utility can be:

Positive, negative, or zero

Decreasing but not negative

Positive or negative, but not zero

Positive, but not negative

10 points

QUESTION 5

In economics, a product provides utility if it:

is useful

violates the law of demand

takes more and more resources to produce successive units of it

satisfies consumer wants

Which of the following is true of an indifference curve?

Along an indifference curve utility is fixed.

If a consumer is rational then indifference curves may cross.

Indifference curves further from the origin are associated with lower levels of utility than those that are closer to the origin.

Because they are indifference curves, microeconomics students should be indifferent towards them.