Chapter 7 Econ
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As you purchase more and more of any good or service,
-your total utility rises and your marginal utility declines. -If you pay for a product, then you are gaining at least a utility that is equal to the price of the product. So your total utility is rising. But your marginal utility is declining because of the law of diminishing marginal utility.
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The slope of the indifference curve can be calculated using the marginal utilities of both products. The proper formula is MU of the horizontal product / MU of the vertical product because as you go further to the right on the indifference curve, the MU of the horizontal curve gets smaller and the MU of the vertical axis product gets larger. So for the calculation to be in synch with the slope of the budget line, the horizontal product MU must be in the numerator (top).
As the price of a good falls,
consumer surplus rises
The concept based on the assumption that we get bargains on each unit we purchase until the last one is called
consumer surplus.
marginal utility
satisfaction or usefulness obtained from acquiring one more unit of a product
If Mrs. T.F. Baker buys 29 pairs of false eye lashes at the local drug store
she is definitely enjoying a consumer surplus. This is based on the law of diminishing marginal utility. Each pair she buys lowers her marginal utility. She is buying until she buys 29 pairs. So that means that the previous 28 pairs have a higher utility (higher Willingness to pay) than the actual price. The difference is her consumer surplus.
consumer surplus
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
law of diminishing marginal utility
the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time
If you were in the middle of the desert, came upon a lemonade stand, and paid $5 for a glass of lemonade,
you would have gotten at least $5 of utility from the lemonade. If you paid for it, then you are getting that as your utility. If your utility were less than $5, then you would not have bought it.
If you received a free month's trial membership in a gym, you would keep going until your marginal utility reached
zero. If it is for free, you will continue to consumer the product until your marginal utility is zero. You consumer until your marginal utility is zero because that is the price.
Melissa says she will have to be paid in order to even try Jason's cooking, so her marginal utility for Jason's cooking is
NEGATIVE. A person's utility (satisfaction) for a product is based on what they are willing to pay. In this case, she would have to be paid to consume Jason's cooking. So it would be a negative utility.
Total utility is maximized when marginal utility is zero.
Once marginal utility is zero, you have maximized your total utility. Now, this is true for goods that are for free or if you have paid a flat fee for it like a buffet or amusement park. Otherwise, you will maximize total utility when your utility is equal to the price.
As long as total utility is increasing, we know that marginal utility is......
POSITIVE. In order for total utility to increase, marginal utility must be positive. But remember the law of diminishing marginal utility: as you consume more of a good, your utility (satisfaction) for it decreases. If your marginal utility goes negative, then total utility will begin to decrease.
Your marginal utility is the price you would be WILLING to pay not the actual price. The price column represents what you would be willing to pay not the actual price. So total utility is the sum of all the marginal utilities (what you are WILLING to pay).
So just add up all the prices you are willing to pay and you will get $15.00.
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So now, you need to calculate the TOTAL UTILITY for purchasing 3 milkshakes. That total utility will be $10.50. If you buy 3 milkshakes, your total payment will be $8.25 ( 3 * $2.75) $10.50 (total utility) - $8.25 = $2.25
Statement I: The marginal utility of diamonds we purchase is quite high. Statement II: The marginal utility of water we consume is quite high.
Statement I is true and statement II is false. The marginal utility for a diamond is very high because of its scarcity. But the marginal utility for water is very low because of its abundance.
Utility
Utility means "satisfaction" not usefulness.
When marginal utility is negative, total utility is
falling. Total utility is all of your marginal utilities added up. So if marginal utility goes negative, then total utility will begin to fall.
We are maximizing our utility when the ______ of each good and service we purchase is equal to _______.
marginal utility; its price Once your marginal utility is less than the price, you will no longer buy it. So you have maximized your total utility by stopping when the price equals your marginal utility.
total utility
the total amount of satisfaction obtained from consumption of a good or service
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Subtract the $9 from $10.50 and you get $1.50 in consumer surplus.
If price is OF, the consumer surplus is bounded by letters
All of the area above the actual price represents what you would be willing to pay for lesser quantities (the law of demand). The actual price only equals what you are willing to pay for the last unit you bought. So all the other units that you get at the lower price provide you consumer surplus because you would have been WILLING to buy those other lower quantities at a higher price.
Statement I: Utility is measured by how much a person is willing to pay for a good or service. Statement II: If you buy four units of a good, your total utility is higher than if you purchased only three units.
BOTH ARE TRUE Remember that a person's utility is measured by how much they are WILLING to pay. The difference between what a person is willing to pay and the actual price is called consumer surplus. If a person buys a unit of a product, it means that their utility is at least equal to the price. So as long as someone is paying for a product, they are increasing their total utility.
Statement I: Utility is measured by a product's usefulness. Statement II: If you purchased eight ballpoint pens at 75 cents each, you would be enjoying a consumer surplus.
-The first statement is not true. Utility means "satisfaction" not usefulness. -The second statement is true because of the law of diminishing marginal utility. If a person buys in bulk, then it is true that until the person buys their last unit, they are paying a price that is less than what they are WILLING to pay. And that difference is their consumer surplus.
Suppose that Ms. Thomson is currently exhausting her money income by purchasing 10 units of A and 8 units of B at prices of $2 and $4 respectively. The utils (marginal utility) of the last units of A and B are 16 and 24 respectively. These data suggest that Ms. Thomson:
-should buy less B and more A. You need to divide the marginal utility by the price in order to get the utils per dollar. Product A costs $2. The marginal utility for the last unit purchased for product A is 16. So the utils per dollar for product A is 8 utils. Now, lets do the same thing for product B. Product B costs $4. The utils for the last unit purchased for product B is 24. Dividing 24 by $4, we get 6 utils per dollar. So product A gives you more utils per dollar than product B. So it would be wise to consumer less of product B and more of product A.
As you consume more and more of a service,
That means that their consumer surplus is INCREASING.your consumer surplus is definitely increasing.This always assumes that the person is buying a product at the same price. A person will buy a product until their marginal utility (which is decreasing) equals the price. So until the person buys their last unit, the price they are willing to pay is greater than the actual price.
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The MRS equals the budget line slope which is .50. That means that point on the budget line is tangent to the highest indifference curve that it can afford. All other points the cross the budget line would be lower indifference curves.
consumer surplus
The difference between the maximum amount a person is willing to pay for a good and its current market price.