Economics Chapter 8

Marginal utility theory

price of one good rises, demand for another good can serve as a substitute increase; occurs because marginal utility per dollar of the good whose price has risen will decrease

Utility maximizes

highest level of utility attained, all of a person's budget is spent

Suppose the price of a soda is $2 each, the price of a hot dog is $3 each and the budget is $20. If the marginal utility of the fourth soda is 100 and the marginal utility of the fourth hot dog is 150, to maximize utility, a person will buy

4 sodas and 4 hot dogs

Sarah consumes pizzas and hamburgers. The price of a hamburger is $1 and the marginal utility from her last hamburger is 5. Pp be the price of a pizza and MUp be the marginal utility of pizzas. In consumer equilibrium, the ratio MUp/Pp for Sarah's last pizza must equal

5.0

Utility

a testable hypothese about the level of hapiness achieved from consumption of goods

The marginal utility of good A changes sharply as its consumption increases and the marginal utility of good B changes slowly as its consumption increases. The price elasticity of

demand for B exceeds the price elasticity of demand for A.

Consumption of good decreases

marginal utility increases, total utility decreases

Budget line determination

need to know prices of items and subjects income

Stacey watches five movies a month at a total cost of $30. She values the first movie at $14, the second at $12, the third at $10, the fourth at $8, and the fifth at $6. Her consumer surplus from seeing five movies is

$20

Let MUa and MUb stand for the marginal utilities of apples and bagels. Let Pa and Pb stand for their prices. The general necessary condition for consumer equilibrium is

MUa/Pa = MUb/Pb.

Diminishing marginal utility

an assumption of utility theory