Microeconomics Chapter 5

Maximum utility is achieved when

marginal utility is zero.

Total utility is maximized when the

marginal utility is zero.

A consumer maximizes total utility from a given amount of income when the

marginal utility per dollar obtained from the last unit of each good is the same.

Utility refers to the

satisfaction obtained from a good or service.

The marginal utility for a good is computed as

the change in total utility divided by the change in quantity.

Marginal utility is

the change in total utility obtained by consuming one additional unit of a good or service.

Consumer surplus measures

the difference between the maximum price a consumer is willing to pay, and the price actually paid.

(Figure 19.2) Diminishing marginal utility begins after

the first apple.

Jose goes to an all-you-can-eat buffet at a Chinese restaurant and consumes three plates of food. He does not go back for a fourth plate of food because

the marginal utility of the fourth plate would no longer be positive.

Total utility is

the sum of the marginal utilities from the consumption of a good.

(Table 19.3) Assume the price of cola is $8 per unit and the price of pretzels is $4 per unit. Michael's Utility Schedule Units of Cola TU of Cola MU of Cola Units of Pretzels TU of Pretzels MU of Pretzels 1 40 40 1 30 30 2 - 32 2 - 20 3 96 24 3 66 16 4 112 - 4 78 - 5 124 - 5 84 - What is the marginal utility of the fifth unit of cola?

12

(Figure 19.2) The total utility of five apples is

18 utils

(Table 19.1) Josh is eating pizza at his favorite Italian restaurant. The marginal utility Josh enjoys from the fourth slice of pizza is

5 utils.

(Table 19.1) Josh is eating pizza at his favorite Italian restaurant. What is Josh's total utility from consuming the third slice of pizza?

54 utils

Which of these scenarios is an example of price discrimination?

Senior citizens pay one price at the movie theater while other adults pay more.

Price discrimination works best when

buyers do not have perfect information about the price.

Price discrimination

is a way for sellers to elicit the maximum willingness to pay from buyers.

When sellers price discriminate:

they are attempting to charge a price that is the maximum price each individual is willing to pay.

Quantity Consumed Total Utility Marginal Utility 1 15 15 2 - 9 3 30 - 4 - 3 The total utility when four units are consumed is

33.

Use the figure to answer three questions. If the price of a Spyder drops to $700,000, a. how many Spyders can be sold at that price? b. how much consumer surplus will there be if all the cars are sold at that price? a. Combined consumer surplus: c. How much revenue (= price × quantity) will the car dealer get if he sells all the cars at: a. (i) the same price ($700,000)? b. (ii) what is the maximum price each buyer is willing to pay?

If the price of a Spyder drops to $700,000, a. 7 b. Combined consumer surplus: $1,050,000 c. a. (i) the same price ($700,000)? $4,900,000 b. (ii) what is the maximum price each buyer is willing to pay? $5,950,000

Assume Amanda always maximizes her total utility given her budget constraint. Every morning for breakfast she has two eggs and three sausages. If the marginal utility of the last egg is 10 utils and the price of eggs is $1 each, what can we say about the marginal utility of the last sausage if the price of each sausage is $2?

It must be equal to 20 utils.

Rosa is willing to pay $200 for the iPhone, but the actual price is $400. This means

Rosa will not buy an iPhone.

If a product has a high marginal utility, then

a consumer is willing to pay a high price for it.

Suppose the graph below depicts the demand for football tickets at Grand University. Instructions: Enter your responses as a whole number. a. If current demand is represented as D2, what is total revenue (= price × quantity) at the price of $24? b. If the price changes to $12, how many tickets would consumers purchase? c. What is total revenue at that point? d. If the team has a losing streak that shifts the demand curve and the price is still $24, at what point do we end up? a. On demand curve __________ selling __________ tickets e. What is the total revenue at that point?

a. $132,000 b. 10,000 c. $120,000 d. On demand curve D3 selling 2,500 tickets e. $60,000

Airline companies engage in price discrimination by

charging higher prices to customers who must travel on short notice.

Graphically, as a consumers buy more of a good, the marginal utility line will

continuously decline if diminishing returns are present.

The additional pleasure or satisfaction from a good will decline as more of it is consumed in a given period. This is the definition of the

law of diminishing marginal utility.