Quiz 4: Demand Analysis

Business

A. True. It is assumed that the more a consumer has the more utility he will derive as he will be in a better position to satisfy his wants which are endless. B. False. The consumer only needs to know whether he prefers one good over the other or not. He does not need to know how much he prefers it over another as is assumed in the ordinal utility theory. C. False. It is the utility function which relates satisfaction or well being to the consumption of goods and services. D. True. This is because the non satiation principle says that the consumer is never satiated. However, at a particular place and time, it is possible that consumer feels satiated, so we assume that the non satiation principle abstracts from time and place considerations. E. False. The marginal utility only measures the satisfaction derived from the additional unit of consumption. The overall satisfaction is measured by the total utility.

It is true in saying that the utility derived from consumption is intangible because there is no standard way to measure utility. This is an ordinal concept. For example, if a consumer says that he prefers peaches over lemons, then the consumer is indicating that the utility derived from peaches is greater than the utility derived from lemons. But the amount by how much the utility from pear is greater than the utility from lemon is not measurable. This gives an idea about a consumer's preferences which play an essential role in identifying his indifference curves. Thus it is wrong to say that the utility concept has no practical value. Conclusion: The utility derived from consumption is intangible and unobservable BUT the utility concept has practical value.

A. False. It is the marginal utility gained from consumption that eventually declines and not utility which suggests total utility. B. False. When prices are held constant, there is an increase in the cost of each marginal unit of satisfaction with diminishing marginal utility for consumption. C. True. The marginal utility measures the utility derived from additional unit of consumption. D. False. When goods are relatively scarce, the law of diminishing marginal utility means that the added value of another unit of goods will be greater than the added value of another unit of services. E. True. The demand curve is downward sloping because of the diminishing marginal utility.