ECON:1100 Chapter 6

Utility

satisfaction gained from consuming a good or service or participating in an activity

Assume that Jill always consumes at the utility-maximizing point. If the utility from the last soda she consumes is 40 and its price is $2, and the utility from the last bucket of popcorn is 20, then we know that the price of the bucket of popcorn is ____.

$1

If the price of a hot dog is $2 and your willingness to pay is $3, then your consumer surplus is _____.

$1

Suppose Gail is willing to pay $89 for a new pair of shoes and Karen is willing to pay $60. What is the gain in total consumer surplus if the price of the shoes falls from $70 to $50?

$30

Frank is willing to pay $1,000 for the first class he takes this semester, $850 for the second, $700 for the third and $500 for the fourth. If the price of a class is $750, what is Frank's consumer surplus?

$350

Frank is willing to pay $1,000 for the first class he takes this semester, $850 for the second, $700 for the third and $500 for the fourth. If the price of a class is $750, how many classes will he take?

2

If a good is provided for free, it is likely to have a marginal utility that is relatively ______________ and be ______________ the marginal utility that could be gained from producing some other good.

Low; less than

Using the information in the previous question, assume that Jill is not consuming at the utility-maximizing level. The marginal utility of soda is 40 and its price is $2, but the marginal utility of popcorn is now 30, and its price is $1. What should Jill do to maximize her utility?

Consume less soda and more popcorn

Assuming a good is a normal good, a decrease in price will lead to a substitution effect that does what?

Along with the income effect, increases quantity

If the price of a good falls and, because of the income effect, consumption of the good also decreases, we know that the good is ______.

An inferior good

Suppose that the price of a pizza is $10 and the price of a video game is $30. Currently, Aaron is consuming such that the ratio of his marginal utility of pizza to marginal utility of video games is ¼. If he wants to maximize his utility, what should he do?

Buy fewer pizzas and more video games

The marginal utility from drinking one more glass of water is likely to be ____________ the marginal utility from going to one more movie.

Less than

Assume Anna is consuming two goods, movies and books, and at her current level of consumption, the marginal utility of the last movie is 10 and the marginal utility of the last book is 5. The price of a movie is $12 and the price of a book is $4. In order to maximum her utility, what should Anna do?

Decrease her consumption of movies and increase her consumption of books.

Assuming a fixed budget, when the price of one good increases, consumers will adjust their consumption patterns in a way that the marginal utilities of all goods will _________.

Decrease, but the marginal utility of the higher priced good will increase.

If the price of a normal good increases, the income effect ______________ the quantity of that good.

Decreases

When the price of a good increases, consumer surplus ________.

Decreases

Diminishing Marginal Utility

Decreasing satisfaction or usefulness as additional units of a product are acquired

A consumer is maximizing her satisfaction and currently consuming three goods. If her tastes change so that the marginal utility she gains from movies increases, what will happen to her consumption of the other two goods - hamburgers and football games?

Her consumption will decrease because the ratio of their marginal utilities to their prices is now less than the ratio of the marginal utility of movies to the price of a movie.

When Jane's income doubles, she increases her consumption. For all normal goods that Jane consumes, what is true?

Her marginal utility per dollar will decrease

Fred just ate a hamburger and received total utility of 15 from consuming it. If he eats another one, which of the following will be true?

His total utility will likely increase

Assume you spend all of your income on two goods: peanuts and chips. Also assume that you are consuming the combination of peanuts and chips that maximize your utility. Which of the following statements is true?

If the price of peanuts is equal to the price of chips, then the marginal utilities must also be equal.

Real Income

Income adjusted for price changes. A measure of the amount of goods and services one can purchase.

If a consumer is currently maximizing her satisfaction, what will happen to the marginal utility of a good when its price increases? The marginal utility will __________.

Increase, because the consumer will decrease her consumption of the good.

If the price of a normal good decreases, the substitution effect ______________ the quantity of that good.

Increases

If David buys more coffee and less ice cream, the ______________ of coffee will ______________ , and the ___ of ice cream will ______________.

Marginal utility; fall; marginal utility; rise

Marginal Analysis

Maximizing total well-being if the last dollar spent on each good provides the same additional utility as the last dollar spent on every other good.

Marginal Utility per Dollar

Ratio of marginal utility to price

Consumer Surplus

The amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

Marginal Utility

The change in total utility or satisfaction resulting from consuming one more unit of a good or service

The reason the demand curve slopes downward is that for most goods which of the following is true?

The income effect of a price change is less than the substitution effect and the substitution effect of a price increase always causes reductions in consumption.

Utility Maximizing Rule

The point where marginal utility per dollar of good 1 is equal to the marginal utility per dollar of good 2. MU1/P1 = MU2/P2

If the price of a good changes, why does an income effect exist?

The price change causes a change in real income

Which of the following would cause an increase in consumer surplus in the market for cars?

The price of steel decreases.

Grace likes eating pizza and going to the movies. If she has $120 to spend in a month, and pizza and movies each cost $10, she decides to eat 5 pizzas and see 7 movies. If the price of movies increases to $12 what is likely to happen?

The substitution effect would predict that she consumes more pizzas and less movies; the income effect would predict that she would consume fewer of both

Which of the following is an example of the income effect?

When the price of tuition increases, Amy eats fewer restaurant meals.

Total Utility

the total amount of satisfaction obtained from consumption of a good or service

Budget Constraint

various combinations of two goods that are affordable, given the consumer's income. (Qa x Pa + Qb x Pb = Y)