Economics Study Set 17

Business

Quiz 5 :

Consumer Choice: Individual and Market Demand

Quiz 5 :

Consumer Choice: Individual and Market Demand

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Some people who do not understand the optimal purchase rule argue that if a consumer buys so much of a good that its price equals its marginal utility, the consumer could not possibly be behaving optimally. Rather, they say, the consumer would be better off quitting while ahead or buying a quantity such that marginal utility is much greater than price. What is wrong with this argument ( Hint: What opportunity would the consumer then miss Is it maximization of marginal or total utility that serves the consumer's interests )
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If a consumer is buying so much of goods where the marginal utility of those goods equals the price, then he/she must be behaving optimally. A consumer would be better off if the price equals marginal utility.
If the goods are purchased where marginal utility does not equal price, then a consumer might not be behaving rationally.
Maximization of marginal utility is taken in to the consideration while determining the consumption level of goods and service.

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Suppose that you wanted to measure the marginal utility of a commodity to a consumer by directly determining the consumer's psychological attitude or strength of feeling toward the commodity rather than by seeing how much money the consumer would give up for the commodity. Why would you find it difficult to make such a psychological measurement
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The marginal utility is the utility derived from the consumption of last unit. After the consumption of each unit a consumer gets additional utility which is called as a marginal utility. An increase in the consumption of the same commodity is likely to reduce the utility derived from each successive unit. The marginal utility diminishes according to an increase in the consumption.
Marginal utility differs from person to person. A consumer's feelings towards the commodity differ. It depends on the intensity of the consumer, that how urgently the consumer wants the commodity.
A thirsty consumer needs water or any cold drink to drink. First glass of the water makes him feel relax. Second glass of water gives him/her relatively less utility than first one.
We conclude that when the consumer is thirsty his marginal utility is highest for the first glass of water. His marginal utility becomes less after the consumption of second glass of water. Marginal utility of the third glass of water is minimal because now consumer is not thirsty.
In the given example, one can only say that consumer gets highest or lowest marginal utility after the consumption. You cannot measure his satisfaction or the relief after the consumption. The satisfaction is immeasurable.
Thus, one would not find the exact marginal utility on the basis of psychological measurement.

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You have $20,000 to invest in the stock market, which has been rising rapidly for the past 18 months. What course of action seems rational
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Investing money in the stock market would be a rational course of course. If the stock market is increasing rapidly, then one should invest money in the stock market rather than holding it.
If one would hold the money, then the value of the money is not going to rise. One can get income on the invested money in the stock market.
Thus, to invest in the stock market, which has been rising rapidly for past 18 months, is rational course of action.

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Which gives you greater total utility: 14 gallons of water per day or 22 gallons per day Why
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At which level do you get greater marginal utility: 14 gallons per day or 22 gallons per day Why
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Draw a graph showing the consumer's surplus Jim would get from his strawberry purchase in Test Yourself Question 5, and check your answer with the help of your marginal utility table.
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Which of the following items are likely to be normal goods for a typical consumer Which are likely to be inferior goods a. Expensive perfume b. Paper plates c. Secondhand clothing d. Overseas trips
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John Q. Public spends all of his income on tacos and hot dogs. Draw his budget line under several conditions: a. His income is $100, and one taco and one hot dog each cost $2. b. His income is $150, and the two prices remain the same. c. His income is $100, hot dogs cost $2 each, and tacos cost $2.50 each.
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Consider a market with two consumers, Jasmine and Jim. Draw a demand curve for each of the two consumers, and use those curves to construct the demand curve for the entire market.
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Draw some hypothetical indifference curves for John Q. Public on a diagram identical to the one you constructed for Test Yourself Question 1. a. Approximately how many tacos and how many hot dogs will Mr. Public buy b. How will these choices change if his income increases to $150 Is either good an inferior good c. How will these choices change if the price of a taco rises to $3.00
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A bottle of wine you bought 15 years ago for $20 now has a market value of $1,500. Would you sell your bottle at that price or keep it for an important occasion Would you purchase another bottle of such old wine at that high price
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What inferior goods do you purchase Why do you buy them Do you think you will continue to buy them when your income is higher
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Describe some of the different ways you use water. Which would you give up if the price of water were to rise a little If it were to rise by a fairly large amount If it were to rise by a very large amount
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Suppose that strawberries sell for $3 per basket. Jim is considering whether to buy zero, one, two, three, or four baskets. On your own, create a plausible set of total and marginal utility numbers for the different quantities of strawberries (as we did for pizza in Table 1), and arrange them in a table. From your table, calculate how many baskets Jim would buy.
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Emily buys an air conditioner that costs $700. Because the air in her home is cleaner, its use saves her $250 in curtain cleaning costs over the lifetime of the air conditioner. In money terms, what is the opportunity cost of the air conditioner
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Explain the information that the slope of an indifference curve conveys about a consumer's preferences. Use this relationship to explain the typical U-shaped curvature of indifference curves.
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