ECONO 2202 CH 10

two conditions for maximizing utility

1 Satisfy the rule of equal marginal utility per dollar spent 2 Exhaust your budget Spending on pizza + spending on coke = amount available

common mistakes in making decisions

1. they ignore non-monetary opportunity costs 2. they fail to ignore sunk costs 3. they are unrealistic about future behavior

Use the information in the following table to calculate the marginal utility from consuming the second ice cream cone. Ice Cream Cones Total Utility Marginal Utility 1 10 ​? 2 18 ​? 3 ​? 6 4 28 ​? 5 ​? 2 A. 8 Your answer is correct. B. 9 C. 10 D. 18

8

Part 2 of 2 What is a budget​ constraint? A. It is the limited amount of income available to consumers to spend on goods and services. Your answer is correct. B. It is the amount of money necessary to purchase a given combination of goods. C. It is the amount of income that yields equal marginal utility per dollar spent. D. It is the amount of utility that a consumer receives from spending a limited amount of income on goods and services. The optimal combination of pizza and coke you should consume is the one A. where your marginal utility of pizza equals your total utility of​ pizza, and your marginal utility of coke equals your total utility of coke. B. where your marginal utility of pizza equals your marginal utility of coke. C. where your total utility of pizza equals your total utility of coke. D. where your marginal utility per dollar spent on pizza equals your marginal utility per dollar spent on coke.

It is the limited amount of income available to consumers to spend on goods and services. where your marginal utility per dollar spent on pizza equals your marginal utility per dollar spent on coke.

the economic model of consumer behavior

Predicts that consumers will choose to buy the combination of goods and services that makes them as well off as possible from among all the combinations that their budgets allow them to buy.

Part 3 of 3 What is the definition of marginal​ utility? A. The enjoyment or satisfaction people receive from consuming goods and services. B. The change in utility from consuming an additional unit of a good or service. Your answer is correct. C. Utility measured in utils. D. The utility from consuming a good or service divided by the number of units of that good or service consumed. E. The average utility from consuming a good or service multiplied by the number of units of that good or service consumed. The law of diminishing marginal utility suggests that A. consumers experience less total satisfaction from inferior goods than from normal goods. B. consumers experience less total satisfaction on lower budget constraints. C. consumers experience diminishing additional satisfaction from a good or service over time. D. consumers experience less total satisfaction as they consume more of a good or service. E. consumers experience diminishing additional satisfaction as they consume more of a good or service. Your answer is correct. Marginal utility is more useful than total utility in consumer decision making because A. consumers maximize utility by maximizing marginal utility from each good. B. optimal decisions are made by consuming until marginal utility becomes negative. C. optimal decisions are made at the margin. Your answer is correct. D. it is possible to measure marginal utility but not total utility. E. consumers maximize utility by equalizing marginal utility from each good.

The change in utility from consuming an additional unit of a good or service. consumers experience diminishing additional satisfaction as they consume more of a good or service. optimal decisions are made at the margin.

opportunity cost

The highest-valued alternative that must be given up to engage in an activity.

sunk cost

a cost that has already been paid and cannot be recovered

network externalities

a situation in which the usefulness of a product increases with the number of consumers who use it

network externality

a situation in which the usefulness of a product increases with the number of consumers who use it

effect of celebrity endorsement

makes a product more desirable

According to the law of diminishing marginal​ utility, as the consumption of a particular good​ increases, A. total utility increases by larger and larger amounts. B. marginal utility decreases. Your answer is correct. C. total utility decreases. D. marginal utility increases.

marginal utility decreases.

total and marginal utility example video 2

marginal utility per dollar spent

how do we make the best consumption decision?

maximize utility by following the rule of equal mariginal utility per dollar spent

do economists account for tastes?

no. they only account for utility

substitution effect

the change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods that are substitutes, holding constant the effect of the price change on consumer purchasing power

income effect

the change in the quantity demanded of a good that results from the effect of a change in price on consumer purchasing power, holding all other factors constant

Marginal Utility (MU)

the change in total utility a person receives from consuming one additional unit of a good or service

Utility

the enjoyment or satisfaction people receive from consuming a good or service

Utility

the enjoyment or satisfaction people receive from consuming goods and services

marginal utility

the extra satisfaction a person gets from acquiring or using one more unit of a product

budget constraint

the limited amount of income available to consumers to spend on goods and services

law of diminishing marginal utility

the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time

behavioral economics

the study of situations in which people make choices that do not appear to be economically rational

endowment effect

the tendency of people to be unwilling to sell a good they already own even if they are offered a price that is greater than the price they would be willing to pay to buy the good if they didn't already own it

Anchoring

the tendency, in making judgments, to rely on the first piece of information encountered or information that comes most quickly to mind

Does fairness matter?

yes