Microeconomics Chapter 7

Consumer Equilibrium equation

MUa/Pa = MUb/Pb=MUc/Pc

What is a "util?"

An artificial construct used to measure utility

(diamond-water paradox resolved) The total utility of water is high because...

water is extremely useful

What is utility?

A measure of the satisfaction, happiness, or benefit that results from the consumption of a good

Consumer equilibrium?

All income is spent and marginal utilities per dollar spent on each good purchased are equal. (Quantities purchased will probably be different). **Consumers goal is to maximize total utility.

Why is marginal utility highest at the first unit?

Because we assume our most urgent wants are met first. Ex: If you are in a desert without water and you find water, you will drink it before doing anything else with it http://www.brainkart.com/media/article/articlenwoieaajradorrefer11.jpg

Total Utility, Marginal Utility, and the Law of Diminishing Marginal Utility

Both total utility and marginal utility are expressed in utils **Marginal utility is the change in total utility divided by the change in the quantity consumed of the good, MU= ∆TU/Q

What is interpersonal utility comparison?

Comparing the utility one person receives from a good, serdvice, or activity with the utility another person receives from the same good, service or activity

What can marginal utility analysis be used to illustrate?

It can be used to illustrate the law of demand, which states that price and quantity demanded are inversely related, ceteris paribus

What is marginal utility?

The additional utility a person receives from consuming an additional unit of a particular good

Application of the Law of Diminishing Marginal Utility

The law of diminishing marginal utility is based on the idea that if a good has a vareity of uses but only 1 unit of the good is avaialble, then the consumer will use the first unit to satisfy his or her most urgent want. If 2 units are available, the consumer will use the second unit to satisfy a less urgent want.

What is the law of diminishing marginal utility?

The marginal utility gained by consuming equal successive units of a goodwill decline as the amount consumed increases. The total utility of something can be rising as the marginal utility of that something is falling. http://www.brainkart.com/media/article/articlenwoieaajradorrefer11.jpg

What is total utility?

The total satisfaction a person receives from consuming a particular quantity of a good

What if there is no interpersonal utility comparison?

The utility obtained by one person cannot be scientifically or objectively compared with the utility obtained from the same thing by another person because utility is subjective

What is the diamond-water paradox?

Things that have the greatest value in use (water) sometimes have little value in exchange and things that have little value in use (diamonds) sometimes have the greatest value in exchange

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 80, 116, 136, 150, respectively. The marginal utility of the sixth wing is...

a. 14 utils b. 139 utils c. 20 utils d. 22.7 utils ANSWER: c, 20 utils

Suppose you are consuming a particuolar good and you could somehow give back the last unit you consumed. What would happen to total and marginal utility?

a. Both total and marginal utility would decrease b. Both total and marginal utility would increase c. Total utility would increase but marginal utility would decrease d. Total utility would decrease but marginal utility would increase e. There would be no change in marginal utility but total utility would decrease

Suppose Valerie is consuming lipstick and eye shadow and nothing else. MUl=24 and MUe=20. The price of eye shadow is $5 and the price of lipstick is $4. What should Valerie do?

a. Consume more eye shadow and less lipstick b. Consume more lipstick and less eye shadow c. Consume less of both d. Consume more of both e. Not change her consumption of either good

Suppose you just finished your third plateful of Thanksgiving dinner and it yielded zero units of additional satisfaction. Should you go back for more?

a. Why not? Since the 3rd plateful gave you zero units, the 4th can't give you any less than zero b. No way. You could get negative utility from the 4th plateful c. Yes or no. It won't make any differnce because your total utility is at its peak. d. Yes. If you received zero units of satisfaction from the 3rd, then obviously the law of diminishing marginal utility is not working in this case ANSWER: b, No way. You could get negative utility from the 4th plateful

Suppose the marginal utility of paperback books is 40 utils and each costs $4 while the MU of video movies is 50 utils and each rents for $4. If you consume one movie and one book per week, are you attaining consumer equilibrium?

a. Yes, so there is no need to change. b. No. You need to buy more books and rent fewer videos c. No. You need to rent more videos and buy fewer books. d. There is not enough information to answer the question ANSWER: c, No. You need to rent more videos and buy fewer books.

Suppose a consumer is purchasing Coke and pretzels in quantities such that she is achieving consumer equilibrium. Then the price of Coke decreases. The consumer will likely ___________ her consumption of Coke and the marginal utility of Coke will ___________ while the total utility from Coke will __________

a. increase; increase; increase b. increase; decrease; decrease c. increase; decrease; increase d. decrease; increase; increase e. decrease; decrease; decrease ANSWER: c, increase; decrease; increase

A consumer is in equilibrium if he or she derives the same

a. total utility from each good consumed b. total utility per dollar spent on each good consumed c. marginal utility from each good consumed d. marginal utility per dollar spent on each good consumed ANSWER: d, marginal utility per dollar spent on each good consumed

(diamond-water paradox resolved) The total utility of diamonds is low in comparison because...

diamonds are not as useful as water`

(diamond-water paradox resolved) The marginal utility of diamonds is high because...

diamonds are so scarce that people end up consuming them at high marginal utility

(diamond-water paradox resolved) The marginal utility of water is low because...

water is so plentiful that people end up consuming it at low marginal utility