economics ch 20
The campus bookstore sells a CD for $12. When you buy a second CD, however, its price is only $8. How does this relate to marginal utility?
Since marginal utility falls as additional units of the good are consumed, consumers are only willing to purchase more as the price falls.
Which of the following examples are used as evidence favoring the bounded rationality assumption?
When purchasing electric appliances such as refrigerators, people sometimes buy the lowest-priced, energy-inefficient models even though the price savings often fail to compensate for higher future energy costs.
The change in the total utility as a result of increasing consumption by one unit is known as
marginal utility
The water-diamond paradox was solved by realizing the price people are willing to pay for a unit of a particular commodity is determined by
marginal utility
At a consumer optimum involving goods X and Y, the marginal utility of good X equals 2 utils. The price of good Y is six times the price of good X. What is the marginal utility of good Y?
12
Carly is maximizing her utility buying hamburger and steak. This week, the price of hamburger has decreased. Carly considers these goods to be close substitutes.
Carly will buy more hamburger and less steak
What is the difference between total utility and marginal utility?
Total utility is the total amount of satisfaction derived from consuming a certain amount of a good while marginal utility is the additional satisfaction gained from consuming an additional unit of the good.
The budget line shows:
all possible combinations of two goods that can be purchased, given money income and the prices of the goods.
Using indifference curve analysis, the consumer optimum occurs
at the point of tangency between an indifference curve and a budget line.
The law of diminishing marginal utility implies that the marginal utility for a particular commodity
decreases as more of the commodity is consumed
indifference curves slope
downward
Total utility...
falls as long as marginal utility is negative. is at a maximum when marginal utility is zero. rises as long as marginal utility is positive.
When an individual's purchasing power changes due to a change in the price of a good or service, this is referred to as
real income effect
According to the substitution effect, if the price of a product goes down
the consumer will buy more of the good at the lower price than at a higher price, creating a downward-sloping demand curve.
As people consume more and more of a particular good or service, we can predict that
the marginal utility of each additional good consumed will fall and total utility will increase, but more slowly than before.
The reason that diamonds cost more than water is
the marginal utility of each diamond a consumer purchases is quite high due to the small amount of diamonds that most consumers purchase.
Rational economic agents would resist consuming any good where
the marginal utility of that good was negative since this would make you worse off. the total utility of that good was falling since this would make you worse off.
marginal rate of substitution
the rate at which a consumer is willing to trade one good for another
The law of diminishing marginal utility insures that
the total utility curve will eventually increase at a decreasing rate.
Utility refers to
the want-satisfying power of a good or service.
In consumer theory, utility is
the want-satisfying power of a good or service.
If the last $5 spent on movies added 30 utils to your total satisfaction and the last $8 spent on books add 64 utils,
you can increase your satisfaction by buying more books and seeing fewer movies.
