Economics: Chapter 7---Utility Maximization Test 3
What we assume about consumer behavior
*Rational Behavior* -consumer is rational and will use income to maximize total utility *Preferences* -consumers have discernible preferences *Budget Constraints* *Prices* -determined in competitive markets -what any individual consumer purchases has no affect on market demand/price
Marginal Utility
*extra* satisfaction a consumer receives from an additional unit of that product -reflects changes in total utility MU= ∆TU/∆Q
the supply of water is great relative to demand and the supply of diamonds is small relative to demand
"Essential" water is cheaper than "nonessential" diamonds because:
subtle changes in policies or practices that result in large behavioral changes
"Nudges" refer to:
Alex may have to lower the price to convince Kara to buy a second slice
While eating at Alex's "Pizza by the slice" restaurant., Kara experiences diminishing marginal utility. She gained 10 units of satisfaction from her first slice pizza consumed, and would only recieve 5 units of satisfaction from consuing a second slice. Based on this information we can conclude that:
Credit card companies want to increase profits by promoting slower repayment, and actual customer payments will be anchored by the smaller payment requirements
Who do credit card companies typically require small minimum payment amounts on their customers' monthly credit card statements?
enrollment in these programs was set as the default option and workers had to request to be unenrolled
participation in company retirement saving programs has increased dramatically because:
Utility
satisfaction one gets from consuming good/service *difficult to quantify, subjective
indifference map
the lines on a topographical map are analogous to a(n):
Total Utility
total amount of satisfaction/pleasure a person derives from consuming some specific quantity
Total Utility and Marginal Utility are measured in...
utils: one unit of satisfaction/pleasure
Consumer equilibrium
when the consumer has balanced out his margins using the utility maximizing rule *maximizing total utility
once the all-you-can-eat meal is purchased, consumers view additional trips back to the buffet as having a price of zero
who do people tend to eat more at all-you-can-eat buffet restaurants than at restaurants where each item is purchased separately?
positive, negative, or zero
Marginal utility can be:
change in total utility obtained by consuming one more unit of a good
Marginal utility is the:
Utility Maximizing Rule
Marginal utility per $: gives a measure of the opportunity cost of successive units of same product *allows for comparisons b/t different-priced products MU of product A/price of A= MU of product B/price of B
negative
Mary says, "You would have to pay me $50 to attend that pro wrestling event." For Mary, the marginal utility of that event is:
noncash transfers are less efficient than cash transfers
Most economists contend that:
diminishing marginal utility
Newspaper dispensing devices seemingly "trust" people to take only a single paper but the devices actually rely on the law of:
reduce recipient utility to a cash gift because noncash gifts often fail to match recipient preferences
Noncash gifts:
has a higher "marginal utility to price ratio" for the hockey game than for the play
Prashanth decides to buy a $75 ticket to a particular New York professional hockey game rather than $50 ticket for a particular Broadway play. We can conclude that Prashanth:
more of X and less of Y
Suppose that MUx/Px exceeds MUy/Py. To maximize utility the consumer who is spending all her money income should buy:
should buy less B and more A
Suppose that Ms. Thomson is currently exhausting her money income by purchasing 10 units of A and 8 units of B at prices of $2 and $4 respectively. The marginal utility of hte last units of A and B are 16 and 24 respectively. These data suggest that Ms. Thomson:
it should advertise that the "low fat" sour cream has only "half the fat" of the regular sour cream
Suppose that dairy barn foods produces a regular sour cream with 10 grams of fat per serving, and a "low fat" sour cream with only 5 grams of fat per serving (assume that this still considered a lot of fat to consume per serving). According to prospect theory, how should Dairy Barn promote its "low fat" sour cream.
their marginal utilities are the same
Suppose you have a limited money income and you are purchasing products products A and B whose prices happen to be the same. To maximize your utility you should purchase A and B in such amounts that:
marginal utility of extra soft drink cans or bottles declines slowly, particularly because they are storable and can be consumed later
Unlike newspaper dispensing devices, soft drink dispensing machines do not permit people to take more than one can or bottle with each payment. The reason is that the:
satisfaction that a consumer derives from a good or service
Utility refers to the:
they all help explain the downsloping demand curve
What do the income effect, the substitution effect, and diminishing marginal utility have in common?
X rises and the marginal utility of Y falls
When a consumer shifts purchases from product X to product Y the marginal utility of:
zero
Where total utility is at a maximum, marginal utility is:
Where the budget line is tangent to an indifference curve
Assume a diagram in which a budget line is imposed on an indifference map. A consumer will maximize her utility:
Consumer's utility is maximized when...
income is allocated so that last dollar spent on each product yields same amount of extra satisfaction/(marginal utility)
people isolate purchases and sometimes make irrational decisions
Because of "mental accounting"
Applications
*iPads*: marginal utility is very low (only need 1), but Apple keeps updating the product, enticing buyers of the old model to buy new *Diamond-water paradox*: water= essential to survival, but priced lower than diamonds (luxury good) *how it was solved*-- -water is great in supply relative to demand, thus having a lower price per gallon -diamonds=rare, small in supply relative to demand, thus having a higher price per karat *conclusion*--water has a higher TU than a diamond's TU even though diamonds' price exceeds the price of water greatly *Opportunity Cost/Time*: high productive labor in an industrially advanced society--time has value low income, developing society--time: low market value *Medical Care Purchases*: when you are ill--more likely to purchase a great deal of medical care than you would if you were confronted by full price-- *why insurance is necessary to financing health care* *Buffets*: tend to eat more at "all you can eat" than if you purchased it item by item (Positive MU with price being 0!) *Cash/noncash gifts*: may not match recipient's preferences, thus may not add as much as cash to TU
the price of one good relative to the other
A change in the slope of a budget line is solely the result of a change in:
MUa/Pa = MUb/Pb = MUc/Pc ... = MUn/Pn
A consumer is maximizing her utility with a particular money income when:
ratios of the marginal utility of each product purchased divided by its price are equal
A consumer who has a limited budget will maximize utility or satisfaction when the:
marginal utility diminishes as more of a product is consumed
A consumer's demand curve for a product is downsloping because
satisfies consumer wants
A product has utility if it:
each successive unit of loss hurts, but less than the previous unit
According to behavioral economics:
increase the efficiency of gift-giving because they allow the recipient to consume goods
According to economists, gift registries, returning gifts for cash refunds, and "recycling gifts."
consumers feels the loss of a price increase more than they feel the loss of buying a smaller package for their money
According to prospect theory, firms are more likely to shrink packages than raise prices because:
Firms will reduce package sizes, but keep prices the same, thus increasing the per unit price of the good
According to prospect theory, what strategy will firms typically employ with regard to pricing and packaging their goods, when faced with rising production costs
people assign higher values to things they own than things they don't
According to the "endowment effect:"
whether a new situation is viewed as a gain or a loss depends on one's starting position
According to the concept of framing effects:
decrease the marginal utility per dollar spend on A
An increase in the price of product A will:
combinations of two products yielding the same total utility to a consumer
An indifference curve shows all:
is downsloping and convex to the origin
An indifference curve:
curves farther from the origin yield higher levels of total utility
An indifference map implies that:
Can influence decision-making with irrelevant information
Anchoring:
is unattainable, given the consumer's income
Any combination of goods lying outside of the budget line
more of B and less of A
Ben is exhausting his money income consuming products A and B in such quantities that MUa/Pa = 5 and MUb/Pb = 8. Ben should purchase:
demand curves are downsloping
Diminishing marginal utility explains why:
her money income increasing more than proportionately to increases in the prices of X and Y
Edith is buying products X and Y with her money income. Suppose her budget line shifts rightward (outward). This might be the result of:
Apple introduced new features to entice previous buyers to purchase new models
How did Apple overcome consumers' diminishing marginal utility for iPods?
the marginal utility of the last dollar spent on each good purchased will be the same
If a rational consumer is in equilibrium, which of the following conditions will hold true?
Marginal Utility, Demand and Elasticity
If successive units of a product yield less MU, the consumer will buy additional units *only if price falls* Rate of decline in MU: determines price elasticity of demand MU falls sharply=Ed is inelastic if MU does not=Ed is elastic
increase the marginal utility of the last unit consumed of this good
If the price of product X rises, then the resulting decline in the amount purchased will:
is positive, but may be either increasing or decreasing
If total utility is increasing, marginal utility:
there is a $10 or 50% value loss
If you recieve a gift whose market price is $20, but you consider it to be worth only $10, then:
one should consume less of time-intensive goods
In introducing the opportunity cost of time into the theory of consumer we find that, all else equal:
the prices of both products and money income are assumed to be constant
In moving along a given budget line:
budget line to the left
Increases in product prices shift the consume's:
presumes only that the consumer can say one combination of two goods yields more or less utility than some ohter combination
Indifference curve analysis:
Josh's satisfaction with that salary depends on how much he made in the past
Josh will recieve a salary of $300,000 next year. According to prospect theory:
the positive utility Laua received from seeing her portfoli value rise was less than the disutility she felt when its value declined
Last month Laura saw the value of her stock portfolio rise by $20,000. this month, she saw the value of her portfolio decline by $20,000. According to behavioral economics:
utility
The ability of a good or service to satisfy wants is called:
all possible combinations of two goods that can be purchased, given money income and the prices of the goods
The budget line shows:
essential goods may be cheap while nonessential goods may be expensive
The diamond-water paradox arises because:
the price of a product is related to its marginal utility, not its total utility
The diamond-water paradox occurs because:
increases the amount of health care consumed by reducing the price of additional units of care
The fact that most medical purchases are financed through insurance:
increasing our level of consumption doesn't make us any happier in the long term
The hedonic trendmill refers to a phenomenon where:
demand curves slope downward
The law of diminishing marginal utility explains why:
beyond some point additional units of a product will yield less and less extra satisifacion to a consumer
The law of diminishing marginal utility states that:
declines as one moves southeast along an indifference curve
The marginal rate of substitution
consumer's willingnes to substitute one product for another so that total utility will remain constant
The marginal rate of substitution measures the:
mental accounting
The process by which people isolate purchases and fail to consider all consumption options simultaneously is known as
price ratio of the two products
The slope of a budget line reflects the:
total utility
The theory of consumer behavior assumes that consumers attempt to maximize:
consumers behave rationally, attempting to maximize their satisfaction
The theory of consumer behavior assumes that:
is the satisfaction or pleasure one gets from consuming it
The utility of a good or service:
marginal utility obtained from the last dollar spent on each product is the same
To maximize utility a consumer should allocate money income so that the:
Relationships of Utility and Quantity
Total Utility: always increasing until diminishing marginal utility occurs--decreases Marginal Utility: always decreasing when MU=0--didn't add/take away utility
summing the marginal utilities of each unit consumed
Total utility may be detrmined by:
alternative combinations of two goods that a consumer can purchase with a given money income
a budget line shows the:
utility
a topographical map shows successively higher equal-elevation lines, whereas an indifference map shows successively higher levels of total:
Law of Decreasing/Diminishing Marginal Utility
as the consumption of a good/service increases, marginal utility obtained from each additional unit of that good/service decreases *explains downward sloping demand curve* *also explains consumer behavior* *utility maximizing model and demand curve=consistent
Budget Constraints
at any point in time, a consumer has a fixed, limited $ income
Income Effect
effect of a *price change* on a consumer's real income (purchasing power) and the quantity demanded income stays the same (*fixed*), price changes (ex): reduction in price of oranges increases consumer's real income; allowed for an increase in purchasing power of both apple/oranges --> it was as if one's income changed, but it was really product price changed
Substitution Effect
effect of a *price change* on a product's relative value, and therefore, on the quantity demanded implies that a lower price makes a product more relatively more attractive and therefore increases the consumer's willingness to use it as a substitute for other products
may shift either to the right or the left, or not at all
if money income increases and the prices of products A and B both increase, then the budget line:
