ECN 104 Chapter Notes - Chapter 7: Budget Constraint, Demand Curve, Opportunity Cost

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3 Feb 2017

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Chapter 7 consumer choice and utility maximization. Utility is a want-satisfying power not the same as usefulness. Marginal utility: extra satisfaction from consuming one or more unit; change in total utility that results from the consumption of one more unit of a product (can be negative) Utils an imaginary unit of utility. Gains in satisfaction decline as additional units are consumed (this is the law of diminishing marginal utility) Demand curve has a downwards slope due to diminishing marginal utility: successive units of a good yield smaller and smaller amounts of marginal utility, consumer will only buy additional units if price of good falls. A typical consumer: exhibits rational behaviour, knows clear-cut preferences, is subject to a budget constraint, responds to price changes. Mu of product a = mu of product b. Assume consumer uses up entire income (no saving) Utility maximization at each step, spend where mu/$ is highest.

Related Questions

3. Amy is shopping at a dollar store. She is currently buying 5 bracelets that cost $1 each and 4 sodas that cost $1 each. The table below indicates the marginal utility she obtains when she purchases this combination.

	Quantity	Price per Unit	MU per unit
Bracelets	5	$1	30
Sodas	4	$1	40

A consumer maximizes utility when the last dollar spent on any good generates the same satisfaction as the last dollar spent on every other good. Is this consumer maximizing her utility?

If not, should she consume more bracelets or more sodas? Explain.

Answer the following assuming that one more bracelet is purchased and one less soda is consumed:

Recall the law of diminishing marginal utility. What happens to the Marginal Utility of bracelets and the Marginal Utility of soda?

What happens to the Total Utility received?

What happens to the total dollars spent?

periwinklegoldfish217

The law of diminishing returns indicates that:

A) beyond some point, the extra utility derived from additional units of a product will yield the consumer smaller and smaller extra amounts of satisfaction.

B) as extra units of a variable resource are added to a fixed resource, the marginal product will decline beyond some point

C) because of economies and diseconomies of scale, a competitive firm's long-run average total cost curve will be U-shaped.

D) the demand for goods produced by purely competitive industries is downsloping.

orchidrabbit535

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.

ECN 104 Chapter Notes - Chapter 7: Budget Constraint, Demand Curve, Opportunity Cost

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