Economics: Principles & Policy
14th Edition
ISBN: 9781337912679
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning US
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Chapter 5, Problem 2DQ
To determine
Explain why it is difficult to make psychological measurement.
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From economic theory, the willingness of a consumer to give up consumption of one commodity (X) in exchange for an increase in some other commodity (Y) and remain equally satisfied can be mathematically calculated as their marginal utility of good X divided by their marginal utility of good Y. What is the economic term for this measure or concept?
Product M has a price of $7.95.
If the Total Utility an individual receives from
consuming 8 units of Product M is 249 and
the Total Utility for consuming one fewer unit
of Product M is 228, then what is the Marginal
Utility per Price of the 8th unit of Product M?
(Round your answer to 2 digits after the
decimal.)
You have £20 per week to spend, and two possible uses for this money: telephoning friends back home, and drinking coffee. Each hour of phoning costs £2, and each cup of coffee costs £1. Your utility function is U(X,Y) = XY, where X is the hours of phoning you do, and Y the number of cups of coffee you drink.
What are your optimal choices? What is the resulting utility level? You can use the standard result on the constrained maximization of such a function, but must state it clearly.
Now suppose the price of telephone calls drops to £1 per hour. What are your optimal choices? What is the resulting utility level?
How much income per week will enable you to achieve the same quantities at the new prices as the ones you chose before? What income will enable you to attain the same utility as you did before? Comment on your answer in the context of equivalent variation and compensating variation.
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Economics: Principles & Policy
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- Based on several observations, people at older ages tend to buy more luxurious products than when they were younger. Does this mean that diminishing marginal utility of money declines as people age?arrow_forwardWhen consumers have a budget, their utility is maximized by buying a combination of goods such that the marginal utility per dollar is the same for all of these goods. This is because if this were not the case, it would mean that the consumer hadn't used up their entire budget. of their insatiability. if a consumer could get higher marginal utility from one good than from others, they would want to buy more of that good, and less of others. if a consumer could get higher marginal utility from one good than from others, they would want to buy less of that good, and more of others. it guarantees them some variety.arrow_forwardThe utility function of a buyer for x units of tea and y units of coffee is given by u(x, y) = x ^\alpha \times y ^\beta where 0 < \alpha < = 1 and 0 < \beta = 1. The buyer can spend a maximum amount of R in the tea - coffee shop, where unit prices of tea and coffee are p and q respectively. What amount of tea and coffee the buyer can purchase to maximise her utility? tea and coffee the buyer can purchase to maximise her utility?arrow_forward
- All goods have diminishing marginal utility, but for some goods (or activities), marginal utility falls quickly as you consume more, while for others, marginal utility falls slowly. Can you think of examples of goods that you continue to enjoy a great deal as your consumption increases? Can you think of goods for which your marginal utility decreases rapidly?arrow_forwardWhat is the law of diminishing marginal utility for consumers, what is the learning curve of a producer? It seems that as the producer becomes more efficient at producing their product; the consumer tends to have less and less satisfaction from consuming one additional unit of the producer's product. Is this true (think in terms of only one producer and consumer)? Explain your answer.arrow_forwardA rational consumer would want as much as many goods as possible to maximize utility derived from consuming them. Explain.arrow_forward
- This module considers important concepts in economics: Total Utility, Marginal Utility, Diminishing Marginal Utility, and Utility Maximization within a budget constraint. These tools can be applied to personal decision making, particularly the consumption choices we make. Microeconomics often considers rational optimizing behavior by individuals, including consumers. Use the Law of Diminishing Marginal Utility to discuss why Market Demand has to have a downward slope. In other words, in order for consumers to demand a higher quantity of an item, its price must fall. Also use the Law of Diminishing Marginal Utility to explain why consumers often prefer to purchase a variety of goods and services (in other words, we are unlikely to fill a grocery cart with many units of the exact same product). Finally, use the utility optimizing condition that the ratio of Marginal Utility to Price for any good has to be the same across all goods to justify why it may be rational behavior to buy an…arrow_forwardThe concept of diminishing marginal utility says that the satisfaction level of human beings drop as we get more of something. Because of this, we place less value in the good or service and human beings will then demand lower prices for additional units. True or Falsearrow_forwardDescribe how rational consumers maximize utility by comparing the marginal utility-to-price ratios of all the products they could possibly purchase.arrow_forward
- Who introduced utilityarrow_forwardType the correct answer in the box. Spell all words correctly. Vivian conducted market research on her company’s products. She found that after the company raised the price of its product by $1.50, the demand in the uptown region remained the same with only minor fluctuations. However, she found that the demand in the downtown region dropped by 20 percent after the price change. How should Vivian take these demands into consideration? In a situation where demand differs in different areas, Vivian should consider the demand.arrow_forwardTwo students, Nick and Sofia, are discussing normal and inferior goods. Nick says that if Frodo buys more beer when the price of beer goes up, then beer must be an inferior good for Frodo. If, on the other hand, he buys less beer when the price of beer goes up, then beer must be a normal good for Frodo. Sofia disagrees: "Normal and inferior goods are about income changes, not price changes. Therefore, we do not have enough information: beer could be an inferior or normal good in either of these cases." Do you agree or disagree? Carefully explain your point of view. Support your argument with graphs of income, substitution and total effects (please put beer on the horizontal axis and the other goods on the vertical axis). Please assume that Frodo's preferences over beer and other goods are strictly convex and satisfy "more is better" assumption.arrow_forward
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