Marginal Utility and consumer choice

Consumer surplus for the whole market

is the triangular area between the demand curve and equilibrium price in a demand and supply graph

The marginal utility to price ratio tells us that if the price of a good falls, then

its marginal utility to price ratio will rise

A person's utility is _______________________ when the ratios of ____________________________ for each of the goods consumed are _______________.

maximized, MU to Price, equal

Suppose that you are an engineering major and you are required to take English 101, the writing class required of all first-year students. You aren't a great writer but at least you know that every sentence needs a subject, a verb, and the appropriate modifiers. You can earn a B grade in the class in 100 hours of out-ofclass work, whereas, the average first year student requires 150 hours of work to earn a B. In this case, you enjoy

50 hours of producer surplus

Explain the logic behind the marginal-utility-to-price ratio equalization principle

Consumers maximize utility from consumption when the ratios of marginal utility to price are the same for all goods consumed

Why do economists find utility theory useful?

Economists developed utility theory in order to explain consumer choice and the principles underlying demand

If the marginal utility to price ratio for oranges is higher than the marginal utility to price ratio for bananas when Josie leaves the store, then she should have purchased fewer oranges and more bananas. T/F

F

If the marginal utility to price ration is the same for all but a few goods, then a consumer has maximized total utility. T/F

F

Marginal Utility is always a very small quantity. T/F

F

Two people who consume precisely the same quantity of a particular good will enjoy the same utility levels.

F

Utility is the satisfaction or enjoyment that a person obtains from consuming a good that can be meausred precisely by psychological tests. T/F

F

Utils are the units in which psychologists testing devices are calibrated to determine the utilit people obtain from consumption. T/F

F

Economists try to avoid making interpersonal comparisons of utility. However, such comparisons may seem reasonable and useful to make, especially from the standpoint of social policies like taxation and programs to aid the poor. Explain.

Interpersonal comparisons of utility can never be exact. It is natural that people's tastes differ from one another, and this is as true for money as it is for any other good.

You would be inclinec to bid on a good at an auction if

It's MU/P was higher than those for other goods you consume

Suppose that Ron paid a scalper (a seller in the black market for tickets) $300 for a ticket to see the Rolling Stones and his true willingness to pay was $500. We can be sure that

Ron enjoyed $200 of consumer surplus from the purchase

Utility is the ___________________ or _____________________ a person obtains from consuming a good

Satisfaction , enjoyment

Consumer surplus is the difference between what a consumer is willing to pay for a good and what the consumer actually pays. T/F

T

If ruth's consimer surplus is zero, then she must be paying the highest amount that was willing to pay for a good. T/F

T

If water is extremely scarce, then the marginal utility of an additional unit is high and water diamons paradox is less aparent. T/F

T

In choosing to purchase a combination of goods, consumers must consider prices and not just utilities becuase goods are not free. T/F

T

Marginal utility analysis can be used to explain government policies regarding taxation and the redistribution of income from rich to the poor given the reasonablness of diminishing marginal utility of income. T/F

T

The law of diminishing marginal utility suggests that as the quantity consumed increases, the additional to total utility from an additional unit consumed will decrease. T/F

T

The total amount of satisfaction someone enjoys from consuming a specific quantity of goods is called total utility. T/F

T

The water diamond paradox is that water is extremely useful but is valued at a low rate, while diamons are less useful but are valued ay a much higher rate. T/F

T

Given the marginal utility to price ratio equalization principle, if (1)MU/P > (2)MU/P

The consumer should consumer more of good 1 and less of good 2

Why are demand curves for most goods downward sloping?

The law of demand tells us that demand curves will be downward sloping. That is, as the price decreases, quantity demanded increases

What is the law of diminishing marginal utility? Do all people consuming all goods exhibit this law? Give some examples of possible exceptions to the law of diminishing marginal utility.

The law of diminishing marginal utility states that as consumption increases, the addition to total utility from more consumption will eventually decrease Perhaps certain kinds of addictions like alcoholism and drug addictions could be considered exceptions. But even in these cases, individuals eventually experience diminishing marginal utility (if not negative utility) as their lives unravel around them

The value of a good to a consumer depends on

The marginal utility of the last unit consumed

How can the water-diamond paradox be resolved by using the concept of marginal utility?

The water-diamond paradox is easy to explain with utility theory. Since diamonds are scarce, most people have very few of them, and the marginal utility of the last one consumed is very high. Therefore, even though the total utility of diamonds is low relative to the total utility of water, the marginal utility of diamonds is very high compared to the marginal utility of water, which is abundant in most parts of the world. Therefore, people value the last unit of scarce diamonds they consume at a much higher rate than the last unit of abundant water they consume

The water diamond paradox can be explained by showing that

Waters total utility may be higher than diamonds but its marginal utility is lower

Which of the following activities is least likely to exhibit the law of diminishing marginal utility?

a child at a new school making ten new friends at once

Suppose that development of oil fields around the Caspian Sea leads to an increase in the world supply of gasoline. This change in the market for gasoline would lead to

a decrease in the equilibrium price and greater consumer surplus

The law of diminishing marginal utility suggests that

additional units of consumption will add less total utility

Producer surplus can be represented graphically in a demand and supply diagram as the

area between price and the supply curve

We are unable to make precise __________________________ of the marginal utilities of money, which has sobering implications for tax policies that impose higher ________________________ on the wealthy

comparisons between people, taxes

The law of diminishing marginal utility suggests that as more is ___________________ the _________________ a person derives from each additional unit ___________________.

consumed, more, diminishes

Typically, people pay less for goods and services than they are willing and able to pay. What is the concept that economists have developed to explain this phenomenon?

consumers surplus

Suppose that George goes to his favorite ice cream store and buys three single -dip cones, the first for three dollars, the second for two dollars, and the third for one dollar, but enjoys no consumer surplus from the experience. We know that George must

have paid prices for the cones that correspond to points on his demand curve

The difference between the ___________________ amount a person would be willing to pay for a good or service and the amount actually paid is called ___________________________

maximum, consumer surplus

A consumer who has spent all of her income on clothes and food and finds that her marginal-utility-toprice ratio is higher for clothes than for food should, in the future, rearrange purchases to maximize total utility by

purchasing more clothes and less food

Experiments involving laboratory white rats suggest that

rats rearrange their consumption in response to changes in the "price" of available food items

The law of diminishing marginal utility

states that total utility rises at a decreasing rate as consumption increases

Suppose that your roommate comes back to the dormitory exclaiming about what a great deal she got on a new shirt that she would have purchased at the regular price for $35, but she bought on sale for $6. An appropriate response would be to

suggest that your roommate is now enjoying $29 of consumer surplus

Suppose that Jessica's MU/P is 8 for swimming lessons, 12 for voice lessons, and 4 for piano lessons. In order for Jessica to maximize total utility, she should definitely

take more voice lessons

One might argue that French chefs understand the law of diminishing marginal utility better than American chefs because

the French serve many courses of small portions, keeping the marginal utility of each one high

If there is diminishing marginal utility of income, then it may increase social welfare (assuming that it is reasonable to compare utility levels among people) to increase taxes on

the incomes of the rich and give the funds to the poor

Research on the marginal utility of money by sociologists and political scientists suggests that

the marginal utility of income above the subsistence level is not very great

An increase in the price of a good causes people to buy less of it because

the marginal-utility-to-price ratio for the good decreases

As the price of a good falls, people buy more of it because

the marginal-utility-to-price ratio for the good increases

The law of demand tells us that

the quanitity demanded increases as price falls