Chapter 6

If a consumer is currently maximizing her satisfaction, what will happen to the marginal utility of a good when its price increases? The marginal utility will __________.

Increase, because the consumer will decrease her consumption of the good.

diminishing marginal utility

As a consumer purchases more of a good in a specific time period, the additional satisfaction enjoyed from the additional unit of the good will diminish.

Suppose that the price of a pizza is $10 and the price of a video game is $30. Currently, Aaron is consuming such that the ratio of his marginal utility of pizza to marginal utility of video games is ¼. If he wants to maximize his utility, what should he do?

Buy fewer pizzas and more video games

With regards to the income effect and demand - and the good is a normal good, what happens to price and quantity?

If price increases, quantity decreases If price decreases, quantity increases

Marginal utility

change in total utility that one gets from consuming one more unit of a good

total utility

the amount of satisfaction one gets from a good or service

Assume that Jill always consumes at the utility-maximizing point. If the utility from the last soda she consumes is 40 and its price is $2, and the utility from the last bucket of popcorn is 20, then we know that the price of the bucket of popcorn is ____.

$1

Suppose Gail is willing to pay $89 for a new pair of shoes and Karen is willing to pay $60. What is the gain in total consumer surplus if the price of the shoes falls from $70 to $50?

$30

Frank is willing to pay $1,000 for the first class he takes this semester, $850 for the second, $700 for the third and $500 for the fourth. If the price of a class is $750, how many classes will he take?

2

marginal analysis

A consumer will maximize total well-being if the last dollar spent on each good provides the same marginal (additional) utility as the last dollar spent on every other good.

How does diminishing marginal utility affect the decision about how much of a good to purchase compared to another good with the same price?

Because of the law of diminishing marginal utility, the marginal utility of the good purchased will eventually begin to diminish as more and more is purchased. If the marginal utility of the purchased good falls below the marginal utility of other possible purchases that cost the same amount, the buyer will not buy additional units of the first good, and will instead buy more of the other goods that now have a higher marginal utility.

Assume Anna is consuming two goods, movies and books, and at her current level of consumption, the marginal utility of the last movie is 10 and the marginal utility of the last book is 5. The price of a movie is $12 and the price of a book is $4. In order to maximum her utility, what should Anna do?

Decrease her consumption of movies and increase her consumption of books

Assuming a fixed budget, when the price of one good increases, consumers will adjust their consumption patterns in a way that the marginal utilities of all goods will _________.

Decrease, but the marginal utility of the higher priced good will increase.

A consumer is maximizing her satisfaction and currently consuming three goods. If her tastes change so that the marginal utility she gains from movies increases, what will happen to her consumption of the other two goods - hamburgers and football games?

Her consumption will decrease because the ratio of their marginal utilities to their prices is now less than the ratio of the marginal utility of movies to the price of a movie.

With regards to the substitution effect and demand, what happens to price and quantity?

If price increases, quantity decreases If price decreases, quantity increases

With regards to the income effect and demand - and the good is an inferior good, what happens to price and quantity?

If price increases, quantity increases If price decreases, quantity decreases

Assume you spend all of your income on two goods: peanuts and chips. Also assume that you are consuming the combination of peanuts and chips that maximize your utility. Which of the following statements is true?

If the price of peanuts is equal to the price of chips, then the marginal utilities must also be equal.

Explain why the marginal utility of water may be quite high at low levels of consumption, but eventually diminish as you increase your consumption.

If you are very thirsty, then that first glass of water will bring you a great deal of satisfaction and happiness. The second glass might continue to increase your satisfaction but probably will not taste as good as that first glass. By the time you get to the fourth glass, you may be struggling to get it down, and the fifth glass might actually cause you distress.

If a good is provided for free, it is likely to have a marginal utility that is relatively ______________ and be ______________ the marginal utility that could be gained from producing some other good.

Low; less than

If David buys more coffee and less ice cream, the ______________ of coffee will ______________ , and the ___ of ice cream will ______________.

Marginal utility; fall; marginal utility; rise

Are marginal utilities of all goods equal to all other marginal utilities if consumers are maximizing their satisfaction? Explain why or why not.

No. It is the ratio of marginal utilities to prices that are equal. For most people, the marginal utility of an additional Mercedes will be greater than that of an additional plum. But a Mercedes costs much more than a plum, so we need to take into account how much it costs to achieve the additional utility from each. When a dollar "buys" the same amount of satisfaction from each good, then there will be no further incentive to change your buying choices.

What do you think will happen to marginal utility (that is, the satisfaction gained from consuming each additional good) as one consumes more of a good?

The more of something you consume, the less satisfaction another unit will bring you. Sometimes you consume so much of something, that consuming one more will actually lower your overall satisfaction

Which of the following would cause an increase in consumer surplus in the market for cars?

The price of steel decreases.

Who suffers the greater loss of consumer surplus when the price increases: those with elastic demands or those with inelastic demands?

Those with elastic demand. Because they are more sensitive to price changes, they will reduce their consumption by more than those with an inelastic demand.

Given that water is essential to life and diamonds are not, why are diamonds so much more expensive than water (in most parts of the world)?

Water is much more plentiful than diamonds are, so although diamonds are not a necessity, the supply of them is much less than the supply of water.

Assume that you are only consuming apples and plums and you are maximizing your utility. The price of apples is $1 each and the price of plums is $.25 each. Describe what will happen to the utility-maximizing choice if the price of plums increases to $.50.

apples are twice as expensive as plums, you will maximize your satisfaction when the marginal utility of apples is twice that of plums. Again, as you increase your consumption of apples, you will experience diminishing marginal utility. As you decrease your consumption of plums, marginal utility will increase.

When the price of a good increases, consumer surplus ________.

decreases