Module 51 (Utility Maximization)

Principle of diminishing marginal utility

Each successive unit of a good or service consumed adds less to total utility than does the previous unit.

Utility

Is a measure of personal satisfaction

Optimal Consumption Bundle

Is the consumption bundle that maximizes the consumer's total utility given their budget constraints.

Consumption Possibilities

Is the set of all consumption bundles that are affordable, given the consumer's income and prevailing prices.

Budget Constraint

Limits the cost of a consumer's consumption bundle to no more than the consumer's income.

Marginal Utility

Of a good or sevice is the change in total utility generated by consuming one additional unit of that good or service.

Optimal Consumption Rule

Says that in order to maximize utility, a consumer must equate the marginal utility per dollar spent on each good and service in the consumption bundle.

Marginal Utility Curve

Shows how marginal utility depends on the quantity of a good or service consumed.

Budget Lines

Shows the consumption bundles available to a consumer who spends all of their income.

Economists formally identify the satisfaction a person derives from the consumption of goods and services as: : a. utility. b. usefulness. c. pleasure. d. cost. e. happiness.

a.

Which of the following goods is most likely to display increasing marginal utility over some range? a. paint, because you need an amount sufficient to paint at least one entire room b. lobsters, which are so expensive that you must eat two to get your money's worth c. cups of coffee. d. chicken during the 1920s, when it was considered a luxury good e. peanut butter and jelly sandwiches

a.

An individual gets five units of utility from one slice of pizza and nine units of utility from two slices of pizza. The principle of diminishing marginal utility implies that the total utility from three slices of pizza will be: a. between 13 and 20 units of utility. b. more than 14 units of utility. c. exactly 12 units of utility. d. less than nine units of utility. e. less than 13 units of utility.

e.

Suppose bad weather and pollution dramatically reduce the supply of crawfish in Louisiana next year. This would also lead to ________ the marginal utility of crawfish consumption. a. substitution and income effects for b. a decrease in c. an elimination of d. no change in e. an increase in

e.

Marginal utility per dollar

spent on a good or service is the addtional utility from spending one more dollar on that good or service.

The amount by which total utility increases or decreases when an additional unit of a good is consumed is called ________ utility. a. average b. marginal c. diminishing d. maximum e. cumulative

b.

The amount by which total utility increases or decreases when an additional unit of a good is consumed is called ________ utility. a. average : b. marginal c. diminishing d. maximum e. cumulative

b.

The relationship between an individual's consumption bundle and his or her utility is called a: a. consumption function. b. utility function. c. demand function. d. production function. e. budget line.

b.

To say that you can't have too much of a good thing means that for any good that you enjoy (for example, pizza): a. it is valid to measure utility in utils. b. higher consumption implies that marginal utility diminishes and even becomes negative. c. higher consumption will always lead to greater utility .d. higher consumption will increase utility but only up to a point; after that utility will start to decrease. e. higher consumption will cause utility to increase at an increasing rate.

c.

The utility of a good is determined by how much ________ a particular consumer obtains from it. a. usefulness b. cost c. loss d. satisfaction e. need fulfillment

d.

Xavier notices that the marginal utility of working with a tutor seems to fall with each hour the tutor helps him study. If Xavier keeps the tutor until his grade actually begins to fall, his marginal utility will be: a. negative, but beginning to rise. b. positive, but rising more quickly. c. zero. d. diminishing and negative. e. positive, but rising more slowly.

d.

Util

is a unit of utility