Econ Bk Sol

* 4. (v) Consumption to be continuous: It is assumed in this law that the consumption of a commodityshould be continuous. If there is interval between the consumption of the same units of the commodity,the law may not hold good. For instance, if you take one glass of water in the morning and the 2nd atnoon, the marginal utility of the 2nd glass of water may increase.(vi) Suitable quantity: It is also assumed that the commodity consumed is taken in suitable andreasonable

Therefore, Elaine's expectations for birth control sponges effects her demand curve and the supply curve does not change. This leads her to buy more sponges. Lastly, her tastes also is a factor in her demand. In consumers and supplier must expect the

Straight line indifference curves would indicate that Bob is willing to trade one good for another. This is an example of two items being perfect substitutes of each other. Example might be Bob is willing to only trade 1 Coke for 1 Pepsi because he views both tastes the same. Bob would not trade 2 Cokes for 1 Pepsi. Another example might be Bob is willing to trade a coupon for two dollars off at McDonalds for a coupon for one dollar off at Burger King and a coupon for one dollar off at Wendy’s. Bob is impartial to all three restaurants, so in this example, bob’s willingness will be one $2-dollar coupon for two $1-dollar coupons.

specifically, the change in the amount of a good purchased is often highly dependent on its

Tests have been performed with two sets of people. The first group has a small popcorn for $3.00 and a large for $7.00. Most people bought a small. Why? Because they thought the large cost too much! They weren’t willing to pay for the movie as well as an extra $7.00 for the large popcorn. The second group of people had a third choice: a medium popcorn for $6.50. This time, most people bought the large one! This was because they thought they were getting a lot more popcorn for just 50 more cents. “Customers are often more influenced by the fear of loss of savings than by actual savings” (Parent).

that a product possesses these attributes. A larger attitude towards a product increases the probability of

From the words, we can understand that not everyone has the same preferences. According to Jeffrey M.Perloff (2012), a consumer chooses between bundles of goods by ranking them as to the pleasure the consumer gets from consuming each. As consumers, we will consume a good which can give us a higher utility compare to others.

Suppose there was a shift in tastes of consumption. How could that be represented in the equation above?

A theorem proposed by Professors Alchian and Allen in their text, University Economics (1964) has had several rebirths of interest in the literature. The so-called “third law of demand,” or “relative price theorem,” holds that a fixed cost added to a good of varying quality causes the consumer to prefer the category considered of higher quality to the lower.

Choices are made every day, where one is required to determine if an assigned value for an item, product or service, is justified and whether the value that it has been attributed is palatable and will be honoured. The subjective decisions made by any consumer in the market place, about values of a good, service or product is the result of an interplay of supply and demand factors in the market (Dybvig, 2010). For example, do you buy a blouse that is marked $150.00 or do you forgo making that purchase for something different and perhaps cheaper, or maybe purchasing something even more expensive? Do you buy that new iPhone 6 plus, or do you make a decision to purchase an older version of the iPhone series, which is smaller and less inexpensive, but offers most of the same amenities. Or do you buy a blackberry or Samsung, and if so, which model and how much do you want to spend? Factors of utility, scarcity, price, the price alternatives available, and the goals of the owner (desire, and effective purchasing power) all interrelate and affect value (Dybvig, 2010).

Within the field of economics, the utility maximization problem represents an attempt to quantify the rationale used when consumers attempt to maximize the satisfaction, or utility, they derive from the purchase of goods. With the typical predetermined budgetary restriction imposed on the process, consumers must balance their own limited funds against their desire to obtain certain items. This means that the eventual level of utility received from all potential affordable packages, and thus the consumer's optimal choices, can be expressed via the equation x(p, w), where p is equal to a good's price and w is equal to the consumer's wealth. The price of any given product must be considered during any attempt to answer the utility maximization problem, because if , then u must be continuous and no goods can be obtained free of charge (McEachern, 2010). In other words, because the two rules dictating the boundaries of utility maximization within a two-good model clearly state that the marginal utilities per dollar must be equal and the consumer's entire budget must be exhausted, the inclusion of goods which can be obtained free of charge skews any conclusions regarding the consumer's eventual utility. A good which costs nothing will always provide more immediate happiness than one which costs money, and this fact prohibits economists from effectively modeling any two-good comparisons between free and for cost items.

Indifference curves represent the utility the consumer would obtain as a function of certain variables. In portfolio theory, this would mean utility as a function of both expected returns and standard

1. A consumer prefers more to less of every good. Her income rises, and the price of one of the goods falls while other prices stay constant. These changes must have made her better of. TRUE

Assuming that the price of orange juice is less than the price of apple juice, the consumer will maximize her utility by consuming only orange juice. As income varies, only the amount of orange juice varies. Thus, the income-consumption curve will be the orange juice axis in the figure below. If apple juice were cheaper, the income-consumption curve would lie on the apple juice axis.

It means, at any points on indifference curve, the consumer is indifferent about how to combine the two goods. Diagrammatically, if a person chooses 6 units of good Y with 2 units of good X, his utility will not be different from choosing 4 units of Y with 3 units of X, as long as those points are still on the curve.