ECON 2000 Chapter : Outline 9
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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?
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?
|