Unit 3

For two goods, A and B, the rational spending rule is expressed as:

(MUa/Pa)=(MUb/Pb) (this formula indicates that the marginal utility per dollar spent is the same for the two goods, which is what is required for the rational spending rule to be satisfied.)

It is impossible for total utility to be ___ when marginal utility is ___

Decreasing; positive (if marginal utility is positive, that indicates that the last unit of the good consumed added to total utility so total utility must be increasing.)

in some countries, medical care is provided free-of-charge to citizens and is paid for by the government. In those countries, medical care

Is rationed by some non-monetary method (medical care cannot be produced at 0 cost, so if no price is charged for medical care, it must be rationed using some non-monetary method

If a consumer reallocates his or her spending away from good B and towards good A, then the consumer's total utility will increase if

MUa/Pa> MUb/Pb ( then the loss in utility from spending a dollar less on good B will be more than compensated for by the increase in utility from spending a dollar more on good A.)

Let MUc denote the marginal utility that Pablo receives from a cup of coffee, and let Pc denote the price of a cup of coffee. We typically expect that as Pablo buys more coffee

MUc/Pc will fall (We typically expect goods to satisfy the law of diminishing marginal utility. That is, as our consumption increases, the additional utility gained from consuming an additional unit of a good will fall. Thus, as Pablo's consumption of coffee increases, we would expect MUc/Pc to fall)

Suppose that at your current consumption of two goods, A and B, MUA/PA= 25 and MUB/PB= 20. In order to maximize, your utility you should

Purchase more of A and less of B (If the ratio of marginal utility to price is higher for good A than for good B, then you should reallocate your spending away from good B and towards good A since the utility gained from spending an additional dollar on good A will exceed the utility lost from spending a dollar less on good B._

if the marginal utility of the 3rd cup of coffee is 23 and the marginal utility of the 4th cup is 15, then:

There is evidence of diminishing marginal utility ( the fact that the marginal utility of the fourth cup is smaller than that of the third cup reflects diminishing marginal utility)

Higher education is a ____ and assigned textbooks are ___

Want; wants

After subsistence levels of food, shelter, and clothing have been provided, economists refer to all other goods and services as:

Wants

As lynn eats more pizza, we would typically expect her mrginal utility from eating pizza to

decrease (We generally think most goods satisfy the law of diminishing marginal utility. That is, the additional utility gained from consuming an additional unit of a good tends to diminish as consumption increases.)

during Thanksgiving you participated in a pumpkin-pie eating contest. You really enjoyed the first two pies, the third one was okay, but as soon as you ate the fourth one you became ill and lost the contest. Your total utility ______ with the firstthree pies you ate

increased