Microeconomics Chapter 7

MUA ÷ PA = zA = 10 − x MUB ÷ PB = zB = 21 − 2y, where z is marginal utility per dollar measured in utils, x is the amount spent on product A, and y is the amount spent on product B. Assume that the consumer has $10 to spend on A and B—that is, x + y = 10. Note: Px = $1 and Py = $1. How is the $10 best allocated between A and B? How much utility will the marginal dollar yield?

3 on A and 7 on B 7 Utils

Suppose that with a budget of $100, Fatima spends $60 on sushi and $40 on bagels when sushi costs $2 per piece and bagels cost $2 per bagel. Then, after the price of bagels falls to $1 per bagel, she spends $50 on sushi and $50 on bagels. How many pieces of sushi and how many bagels did Fatima consume before the price change? At the new prices, how much money would it have cost Fatima to buy those same quantities (that is, the quantities that she consumed before the price change)? Given that it used to take Fatima's entire $100 to buy those quantities, how big is the income effect caused by the lower price of bagels?

30 pieces of sushi and 20 bagels $80 $20

As a result of having fixed or limited amounts of income, all consumers face which of the following?

A budget constraint

In which of the following ways does the law of diminishing marginal utility support and exemplify consumer behavior?

A downward-sloping demand curve

Mylie's total utility from singing the same song over and over is 50 utils after one repetition, 90 utils after two repetitions, 70 utils after three repetitions, 20 utils after four repetitions, −50 utils after five repetitions, and −200 utils after six repetitions, as shown in the table below. A) Write down her marginal utility for each repetition

A) 50, 40, -20, -50, -70, -150

Which of the following does total utility refer to?

Amount of satisfaction a person gets from a good or service

When people exchange a gift for a different item or for a cash refund, they are doing which of the following?

Attempting to maximize their total utility

Which of the following best describes how a consumer's demand schedule or curve can be derived?

By considering alternative prices at which a good or service might be sold and then determining the quantity a consumer will purchase

The price of goods, combined with the fact that consumers' financial resources are limited, means that consumers must do which of the following?

Compromise on spending

Which of the following best describes consumer choice in relation to preferences for goods and services?

Consumers have a good idea of how much marginal utility they will get from successive units of various products they might purchase.

Which of the following explain why the price of water per gallon is lower than the price of a diamond per carat?

Diamonds have high marginal utility, and therefore, their price is very high per carat. Water is in great supply relative to demand and thus has a very low price per gallon. Diamonds are in small supply relative to their demand, thus their price is very high per carat.

True or False: The law of diminishing marginal utility predicts the consumption behavior of drug addicts quite well.

False

True or false: Utility is objective and easy to quantify.

False

True or false: Water has much lower total utility than diamonds and that is why the price of diamonds greatly exceeds the price of water.

False

Which of the following explains why every good has a price?

Goods are scarce relative to the demand for them.

Which of the following contributes to the inverse relationship between price and quantity demanded that is illustrated by a downward sloping demand curve for a normal good?

Income effect Substitution effect

Does John show diminishing marginal utility for Coke, or does he show increasing marginal utility for Coke?

Increasing marginal utility

Which of the following is a characteristic of utility?

It is difficult to quantify. It is not synonymous with "usefulness". It is subjective.

A family that does not own a refrigerator likely has a strong desire for one, whereas a family with two refrigerators likely has a much-reduced desire for a third. Which of the following best explains this decrease in desire?

Law of diminishing marginal utility

The following table shows the amounts of additional satisfaction (marginal utility) that Ross would get from consuming successive quantities of products A and B. Fill in the MU ÷ P column for each product. If Ross has an income of $64, how many units of each will he purchase to maximize his utility?

MU/P for A - 12,11,10,9,8,7,6 MU/P for B - 12,10.5, 9, 7.5, 6,5,3 7 units of good A 5 units of good B Now suppose that the price of good A rises to $10. If he still has $64 to spend, then to maximize his utility, Ross should purchase: less of good A.

The following table shows the amounts of additional satisfaction (marginal utility) that Ross would get from consuming successive quantities of products A and B. a. Fill in the MU ÷ P column for each product. If Ross has an income of $28, how many units of each good will he purchase to maximize his utility?

MU/P for A - 7,6,4,3,2.5,2,1.5 MU/P for B - 8,7,6,5,3,2.5,2 2 units of good A 3 units of good B

What term refers to the change in total utility that results from the consumption of one more unit of a product?

Marginal utility

The formula for the marginal utility per-dollar-spent of a product is which of the following?

Marginal utility of the product divided by the price of the product

Which best describes the relationship between total utility and marginal utility?

Marginal utility reflects the changes in total utility.

Which of the following offers insight into the preference for cash gifts over noncash gifts?

Marginal-utility analysis

Consider two bundles of coffee and chocolate and how Ted feels about them. The first bundle consists of two cups of coffee and two chocolate bars. The second bundle consists of one cup of coffee and three chocolate bars. If the first bundle gives Ted a total utility of 18 utils while the second bundle gives Ted a total utility of 19 utils, could the two bundles be on the same indifference curve?

No

The formula for the marginal utility per-dollar-spent of a product is the marginal utility of the product divided by its

Price

According the utility-maximizing rule, consumers achieve the greatest amount of satisfaction by doing which of the following?

Purchasing a combination of goods or services whereby the last dollar spent on each good yields the same amount of marginal utility

When consumers seek to maximize their total utility, they are engaging in which of the following?

Rational behavior

The utility-maximizing rule requires which of the following to be true?

That income be allocated so as to equalize the marginal utility per dollar spent on each good or service consumed

Which best describes marginal utility?

The extra satisfaction a consumer gets from buying an additional unit of a product

When consumers will purchase additional units of a product only when the price declines, they are acting in accordance with which of the following?

The law of diminishing marginal utility

Which of the following explains why the demand curve for a given product is downward sloping?

The law of diminishing marginal utility

Which of the following supports the idea that price must fall in order for quantity demanded to increase?

The law of diminishing marginal utility

According to this figure, what could cause the quantity demanded for oranges to increase from four to six?

The price of oranges has to fall to $1.

Which of the following reasons explains why marginal utilities must be put on a per-dollar-spent basis?

To make the amounts of extra utility derived from differently priced goods comparable

Which of the following best describes the meaning of the utility-maximizing rule?

To maximize satisfaction, consumers should allocate income so that the last dollar spent on each product yields the same marginal utility.

True or false: The marginal utility of successive units of a good or service should always be compared against the added cost or price of the good or service.

True

Xenia spends her money on flowers and cookies so as to maximize her total utility. The price of flowers and cookies is $2 each. At that price, Xenia buys three flowers and two cookies. When the price of flowers decreases to $1, Xenia buys eight flowers and one cookie. Which of the following statements about Xenia's reaction to the price change is not true?

Xenia's attainable set was smaller before the price of flowers fell. Xenia's moved to a higher indifference curve after the price of flowers fell.

If John's marginal utility for Coke keeps on increasing no matter how many Cokes he drinks, would it be fair to say that he is addicted to Coke?

Yes

Suppose that John has $3 in his pocket. If Cokes cost $1 each and John is willing to spend one of his dollars on purchasing a first can of Coke, would he spend his second dollar on a Coke, too?

Yes

What about the third dollar?

Yes

Demand curves slope downward because, other things equal,

a decrease in a product's price raises MU per dollar and makes consumers wish to purchase more units.

An increase in real income caused by ______ in the price of a product will allow consumers to buy more of that product. Therefore, this income effect helps explain why the demand curve slopes ______.

a reduction; downward

Columns 1 through 4 in the following table show the marginal utility, measured in utils, that Ricardo would get by purchasing various amounts of products A, B, C, and D. Column 5 shows the marginal utility Ricardo gets from saving. Assume that the prices of A, B, C, and D are, respectively, $18, $6, $4, and $24 and that Ricardo has an income of $106. A) What quantities of A, B, C, and D will Ricardo purchase in maximizing his utility? B) How many dollars will Ricardo choose to save? C) Check your answers by substituting them into the algebraic statement of the utility-maximizing rule.

a) 4 units of good A, 3 units of good B, 3 units of good C, zero units of good D; b) $4; c) $106 (= $18x4 + $6x3 +$4x3 + $24x0 + $4)

Use the table to answer the questions below. At which rate is total utility increasing: a constant rate, a decreasing rate, or an increasing rate? How do you know? "A rational consumer will purchase only 1 unit of the product represented by these data, because that amount maximizes marginal utility." Do you agree? Why or why not? "It is possible that a rational consumer will not purchase any units of the product represented by these data." Do you agree? Why or why not?

a) Total Utility increases at a decreasing rate. With the amount of utility growing over time but increases at a lower amount each time. b) I do not agree as the reason to have a consumption graph is to maximize the consumer consumption to utility. It is necessary to apply the optimal purchasing rule. C) It is possible that a consumer will not purchase any units of the product represented. If the utility from each unit is smaller than the price then it is unlikely the consumer will purchase as it is a loss.

The theory of consumer behavior accounts for time

because time can be used to earn money.

For a consumer with an average income, the ______ is greater than for a consumer with a high income.

budget constraint

People achieve ______ when they have "balanced their margins" according to the utility-maximizing rule.

consumer equilibrium

A consumer's choices are directly influenced by all of the following except

costs of production

If Sue will only buy apples if the price decreases because each apple yields a smaller amount of additional satisfaction, she is exemplifying the law of

diminishing marginal utility

The downward sloping demand curve illustrates the declining nature of marginal utility because _____.

each point on the demand curve meets the utility-maximizing rule

The utility-maximizing rule requires that the marginal utility of product A divided by the price of A should be ______ the marginal utility of product B divided by the price of B.

equal to

If marginal utility becomes negative, then total utility ______ as an extra unit of a good is consumed.

falls

If successive units of a good yield smaller and smaller amounts of marginal utility then the consumer will buy additional units of a product only if its price

falls

A change in total utility from five to nine utils results in marginal utility of ______ utils.

four

The iPad disrupted consumer equilibrium because consumers concluded en masse that iPads had a marginal-utility-to-price ratio (MU/P) that was ______ the ratios for other products.

higher than

Water is much more widely used than diamonds. The price of water is much lower than the price of diamonds because water has a much ______ than diamonds for a typical consumer.

higher total utility

The ______ is the impact that changes in the prices of goods and services have on consumers' real earnings.

income effect

Aaliyah spends her money on lemonade and iced tea. If the price of lemonade falls, it is as though her income _________

increases

In comparing two products, a decrease in the price of one product ______ the marginal-utility-per-dollar spent on it, and the consumer will therefore buy ______ of it.

increases; more

The substitution effect contributes to the _____ relationship between price and quantity demanded that is found along the demand curve.

inverse

''It is irrational for an individual to take the time to be completely rational in economic decision making. ''This statement recognizes that

it would take a great deal of time to consider all the factors of every decision.

The marginal utility (MU) of an additional unit of water consumed by a typical consumer is ______, and the MU of an additional unit of diamond purchased by a consumer is ______.

low; high

The iPad disrupted consumer equilibrium because spending shifted from alternative products with a(n) ______ marginal-utility-to-price ratio to iPads as a way to increase total utility.

lower

The law of diminishing _______ utility states that added satisfaction declines as a consumer acquires additional units of a given product.

marginal

Rational consumers must compare the ______ from each product with its added cost.

marginal utility

Consumer choice is influenced not only by the ______ utility that extra units of a good will yield, but also by how much ______ must be given up to obtain extra units of the good.

marginal; income

Suppose you are consuming two goods, A and B. Your marginal utility from good A is 20 while your marginal utility from good B is 4. In addition, good A costs $10 each and good B costs $2 each. a) According to the utility-maximizing rule, you are b) You should consume

maximizing your total utility the same amount of good b the same amount of good a

The substitution effect

measures the change in the quantity of a good demanded brought about by a change in real income associated with a change in the price of the good.

According to the diamond-water paradox, some "essential" goods have ______ prices than some "unimportant" goods.

much lower

What is marginal utility if total utility is falling?

negative

Betty's total utility from consuming one taco is 10 utils. After consuming her second taco, her total utility rises to 19 utils. The marginal utility of the second taco is ______ utils.

nine

People would rather receive cash gifts over noncash gifts because

noncash gifts may not match recipients' preferences and therefore not maximize total utility

Marginal utilities are expressed in a Blank______ basis in order to make the amounts of extra utility derived from differently priced goods comparable.

per-dollar spent

An individual's demand curve for a product shows how much of the product the individual will _____ at various _____.

purchase; prices

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

reallocate spending from magazines to newspapers.

Jermaine spends his money on cucumbers and lettuce. If the price of cucumbers falls, the MU per dollar of cucumbers will _________blankblank and Jermaine will _______ cucumbers for lettuce.

rise; substitute

As more of a product is consumed, total utility ______ at a diminishing rate, reaches a maximum, and then ______.

rises; falls

The utility of a specific product or service may vary widely from person to person, therefore it is

subjective

The ______ is the impact that a change in a product's price has on its relative expensiveness.

substitution effect

"Telling your spouse the name of the restaurant where you would like to eat for your birthday makes sense in terms of utility maximization." This statement recognizes that

the benefit of making the request will likely exceed the cost.

Consumers are willing to pay a much lower price for water than for diamonds because ______.

the marginal utility of water is low while the marginal utility of diamonds is high

Utility is defined as

the satisfaction or pleasure obtained by consumers from consuming a good or service.

In the last decade or so, there has been a dramatic expansion of small retail convenience stores (such as 7-Eleven, Kwik Trip, and Circle K), although their prices are generally much higher than prices in large supermarkets. The success of these convenience stores can be partially explained by

the time consumers save when purchasing goods there.

Consider the following comment: "Want to make millions of dollars? Invent a product that saves Americans lots of time." This statement recognizes that

time can be used to earn money.

Reginald buys a six-pack of soda. The amount of satisfaction he derives from his purchase is described in terms of

total utility

The pleasure, satisfaction, or happiness obtained from consuming a good or service is known as

utility

Given the different combinations of goods and services consumers can obtain within their budget, the ______ can determine the specific combination that will yield the most utility or satisfaction.

utility-maximizing rule

For illustration purposes, utility can be measured in terms of imaginary units called

utils