chapter 7 micro

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 marginal utility of the last units of A and B are 16 and 24 respectively. These data suggest that Ms. Thomson: a. considers A and B to be complementary goods. b. should buy less A and more B. c. should buy less B and more A. d. has preferences that are at odds with the principle of diminishing marginal utility.

c

While eating at Alex's "Pizza by the Slice" restaurant, Kara experiences diminishing marginal utility. She gained 10 units of satisfaction from her first slice of pizza consumed and would only receive 5 units of satisfaction from consuming a second slice, at the same price. Based on this information we can conclude that: a. even if Kara buys a second slice, she will not buy a third slice. b. Kara will definitely want to buy a second slice of pizza. c. Alex may have to lower the price to convince Kara to buy a second slice. d. Kara will not eat a second slice, even if it is given to her at no charge.

c

marginal utility equation

change in total utility/change in number of units of a good consumed

marginal utility

the extra utility a consumer obtains from the consumption of 1 additional unit of a good or service; equal to the change in total utility divided by the change in the quantity consumed

utility maximizing rule

the principle that to obtain the greatest total utility, a consumer should allocate money income so that the last dollar spent on each good or service yields the same marginal utility. for two goods x and y, with price Px and Py, total utility will be maximized by purchasing the amounts of x and y

utility

the want satisfying power of a good or service; the satisfaction or pleasure a consumer obtains from the consumption of a good or service

total utility

total amount of satisfaction or pleasure a person derives from consuming some specific quantity

income efffect

impact that a change in the price of a product has on a consumer's real income and consequently on the quantity demanded of that good

Suppose there is an increase in the price of product B, with no change in the price of product A. In this case, a. the income effect would cause the marginal utility per dollar of B and the consumption of B to fall. b. the income effect would cause the marginal utility per dollar of B and the consumption of A to rise. c. the substitution effect would cause the marginal utility per dollar of B and the consumption of A to fall. d. the substitution effect would cause the marginal utility per dollar of A and the consumption of A to fall.

a

diminishing marginal utility

as a consumer increases the consumption of a good or service, the marginal utility obtained from each additional unit of the good or service decreases

budget constraint

at any point in time the consumer has a fixed, limited amount of money income

The marginal utility of the last unit of apples consumed is 12 and the marginal utility of the last unit of bananas consumed is 8. What set of prices for apples and bananas, respectively, would be consistent with consumer equilibrium? a. $8 and $12 b. $6 and $4 c. $16 and $9 d. $4 and $6

b

substitution effect

impact that a change in a product's price has on its relative expensiveness and consequently on the quantity demanded