Marginal rate of substitution

Suppliers might have to do a market research in order to forecast the consumer behaviour. To do this efficiently, firms might use marginal utility theory, namely principle of diminishing marginal utility together with indifference analysis. Utility is the satisfaction that people earn from the consumption of a certain quantity of a product (Mankiw and Taylor, 2014). Marginal utility is the additional satisfaction that customer gains from consuming one extra unit within a given period of time. However

pizza for $12. If you order a second pizza, however, the pizzeria charges a price of only $5 for the additional pizza. Explain how an understanding of marginal utility helps to explain the pizzeria’s pricing strategy. 20-1-A. The pricing method that the pizzeria is using shows they understand how marginal utility works, specifically diminishing marginal utility. After hitting the level of satisfaction from the first pizza, a second pizza will not be quite as rewarding. Getting an additional pizza at

willing to give up of good y to get more of good x and remain indifferent. 3. What do we call the magnitude of the slope of an indifference curve? The magnitude of the slope of an indifference curve is called the marginal rate of substitution (MRS). The MRS measures the rate at which the consumer gives up one good to get more of another good, while remaining on the same indifference curve (keeping the consumer indifferent about the changes). The ratio of the quantity of one good needed to replace

QUESTION 11 The least cost technique of producing a given output occurs where the marginal rate of substitution of labour for capital equals the (a) ratio of the quantity of labour used relative to the quantity of capital used. (b) ratio of the price of labour to the price of capital. (c) minimum point on the isoquant line. (d) marginal cost of capital (e) ratio of the marginal cost of capital to the marginal cost of labour. QUESTION 12 A perfectly competitive firm’s supply curve is the

1. The theory of consumer choice provides the foundation for understanding a. the structure of a firm. b. the profitability of a firm. c. a firm 's product demand. d. a firm 's product supply. ANS: C PTS: 1 DIF: 1 REF: 21-0 TOP: Consumer choice MSC: Definitional 2. The theory of consumer choice examines a. the determination of output in competitive markets. b. the tradeoffs inherent in decisions made by consumers. c. how consumers select inputs into manufacturing production processes. d. the determination

dominates the substitution effect. B) As income increases, consumption decreases. C) The income effect reinforces the substitution effect. D) As price falls, we cannot tell whether consumption increases or decreases. E) As income increases, consumption remains constant. 13) 14) What is a distinguishing characteristic of an inferior good? A) a negative price effect B) a negative income effect C) a positive income effect D) an upward-sloping demand curve E) a positive substitution effect

Homework #2 – Solutions 1. Union A wants to represent workers in a firm that would hire 20,000 workers if the wage rate is $12 and would hire 10,000 workers if the wage rate is $15. Union B wants to represent workers in a firm that would hire 30,000 workers if the wage is $20 and would hire 33,000 workers if the wage is $15. Which union is likely to organize? The union will be more likely to attract the workers’ support when the elasticity of labor demand (in absolute value) is small. The elasticity

approach: the factor substitution principle. In the controversies it has been shown that this principle cannot in general be posited to explain the distribution of the social product in terms of supply and demand. This result, discovered by means of the analysis of the relation between prices and distribution in economies with heterogeneous capital goods, has been revealed as theoretically irrefutable, and, as this study will argue, concerns the hard core of the neoclassical or marginal theory both in

hours to work if a person sleeps 8 hours a day. So, the price of leisure, in terms of its opportunity cost is the lost wages from not working. Individuals would consume leisure up to the point where the marginal benefit of leisure equals the marginal cost, where the marginal cost is the wage rate. The optimal labor supply is the package of consumer goods and leisure and implies that an optimal point, the last dollar spent on leisure activities gives the same satisfaction as the last dollar spent

order to hold utility constant. One can calculate how many glasses of water the consumer is willing to sacrifice for another book without changing his total utility through the marginal rate of substitution. According to (BEGG et al., Economics, 11th edition, McGraw-Hill Education, 2014 ), the marginal rate of substitution between two goods measures the quantity of a good the consumer must sacrifice to increase the quantity of the other good by one unit without changing total utility. For example