Ch 5 Demand

Consider a market for surfboards in which there are 5 potential buyers. The first has a reservation price of $100; the second has a reservation price of $200; the third has a reservation price of $300; the fourth has a reservation price of $400 and the 5th has a reservation price of $500. If surfboards sell for $350 and if each potential buyer only wants one surfboard, what will be total consumer surplus in this market? $900 $700 $200

$200 Reason: Two surfboards will be sold. One to the potential buyer whose reservation price is $500 (and who will receive a surplus of $150) and the other to the potential buyer whose reservation price is $400 (and who will receive a surplus of $50). Thus, total consumer surplus will be $200.

consumer surplus

-the difference between a buyer's reservation price for a product and the price actually paid. - sometimes refers to the surplus received by a single buyer in a transaction. -On other occasions, it's used to denote the total surplus received by all buyers in a market or collection of markets.

For two goods, coffee and scones, suppose that MU(coffee)/P(coffee) = 4 and MU(scones)/P(scones) = 3. The consumer should:

Purchase more coffee and fewer scones. (Coffee is "the better deal", getting more from it than the scones)

Law of demand

people do less of what they want to do as the cost of doing it rises

If your marginal utility from eating French fries is positive but decreasing, then this implies that if you eat another French fry, your total utility will decrease will increase will equal zero

will increase. Reason: As long as your marginal utility is positive, consuming more of a good will increase your total utility, even if your marginal utility is decreasing.

The real price of a good is___ -the dollar price of a good relative to the average dollar price of all other goods. -the absolute price of a good in dollar terms.

-the dollar price of a good relative to the average dollar price of all other goods.

Let MUc denote the marginal utility that Pablo receives from a cup of coffee, and let Pc denote the price of a cup of coffee. We typically expect that as Pablo buys more coffee MUc/Pc will rise. MUc/Pc will fall. MUc/Pc will not change. MUc and Pc will both fall.

????? not MUc/Pc will not change.

Suppose you and your friend go out for dinner. Your friend orders a cheeseburger and fries. When your food first arrives, you ask your friend if you can have one of his fries. He looks at you like you are crazy and says, "No!" Then a few minutes later, after you both have started eating, you ask again, and your friend reluctantly says, "Sure. Go ahead." An economist's explanation for your friend's change of heart is most likely to be that: -Your friend's marginal utility from eating additional fries declines as he eats more of them, so he's more likely to share with you after he's eaten a few. -Your friend's total utility declines as he eats more fries, so he's more likely to share with you after he's eaten a few. -Your friend's total utility increases as he eats more fries, so he's more likely to share with you after he's eaten a few. -Your friend's marginal utility from eating additional fries increases as he eats more of them, so he's more likely to share with you after he's eaten a few.

????? Your friend's marginal utility from eating additional fries declines as he eats more of them, so he's more likely to share with you after he's eaten a few.

Utility

Ability or capacity of a good or service to be useful and give satisfaction to someone.

Suppose that Cathy spends all of her income on 20 units of good X and 25 units of good Y. Cathy's marginal utility from the 20th unit of good X is 9 utils, and her marginal utility from the 25th unit of good Y is 19 utils. If the price of good X is $0.50 per unit and the price of good Y is $1.00 per unit, then to comply with the rational spending rule, Cathy should: -purchase more than 20 units of good X and less than 25 units of Y. -purchase less than 20 units of good X and more than 25 units of good Y. -purchase more than 20 units of good X and more than 25 units of good Y. -continue to purchase 20 units of good X and 25 units of good Y.

purchase less than 20 units of good X and more than 25 units of good Y.

Rational Spending Rule

spending should be allocated across goods so that the marginal utility per dollar is the same for each good

The difference between a buyer's reservation price for a product and the price the buyer actually paid is known as consumer ___________

surplus

Nominal price

the absolute price of a good in dollar terms

According to the rational spending rule, spending should be allocated across goods so that -the marginal utility per dollar is the same for each good. -the marginal utility per dollar is the highest for the good we like the best. -the average utility per dollar is the same for each good.

the marginal utility per dollar is the same for each good.

The Scarcity Principle

Although we have boundless needs and wants, the resources available to us are limited. So having more of one good thing usually means having less of another.

Suppose that even though you enjoyed both the first and the second hour you spent at the beach yesterday, the second hour wasn't as much fun as the first. In this case, your marginal utility from the second hour was _____ than the marginal utility of the first hour. positive but lesser negative and lesser positive and greater negative but greater

positive but less

Suppose that when you eat a second slice of your mom's homemade lasagna your total utility increases but it doesn't quite double. In this case, your marginal utility from the second slice is _____ than your marginal utility from the first slice. negative and less negative but more positive and more positive but less

positive but less

marginal utility

the additional utility gained from consuming an additional unit of a good. =change in utility/change in consumption

optimal combination of goods

the affordable combination that yields the highest total utility

utility mazimization

the assumption is that people try to allocate their incomes so as to maximize their satisfaction

Real price

the dollar price of a good relative to the average dollar price of all other goods

Suppose that in response to a decrease in the price of Hondas, people switch from buying Toyotas to Hondas. This is an example of _____ of a price change. the substitution effect the income effect the allocative effect

the substitution effect Reason: The substitution effect of a price decrease is the increase in the quantity demanded that results because buyers switch away from substitute goods.

law of diminishing marginal utility

the tendency for the additional utility gained from consuming an additional unit of a good to diminish as consumption increases beyond some point

total utility

the total amount of satisfaction obtained from consumption of a good or service "measured in utils per hour"

Economists refer to the total satisfaction that people derive from all of their consumption activities as _____. reservation price total utility demand marginal utility

total utility