Chapter 7: Utility Maximization

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

A budget constraint

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

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

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

Marginal-utility analysis

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

Price

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.

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.

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

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

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

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

much lower

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 ______ 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 ________.

purchases; prices

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

substitution effect

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

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

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

utility-maximizing rule

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

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

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.

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

costs of production

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 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

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

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, however, because for a typical consumer water has a much ______ than diamonds.

higher total utility

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

income effect

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

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