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The Law of Diminishing Marginal Utility The law of diminishing marginal utility helps explains the relationship between

the price and quantity demanded of a good. The law of diminishing marginal utility explains why the demand curve for a given product slopes downward. The law of diminishing marginal utility states that added satisfaction declines as a consumer acquires additional unit of a given product. The law of diminishing marginal utility supports the idea that price must decrease in order for quantity demanded to increase. As stated in the law of diminishing marginal utility, what happens to additional satisfaction or utility as consumer acquires additional units of a given product? Declines The law that says, when a good yields smaller and smaller amounts of marginal or extra utility, then the consumer will buy additional units of a product only if its price falls is: the law of diminishing marginal utility If successive units of a good yield smaller and smaller amounts of marginal utility: then the consumer will buy additional units of a product only if the price falls If successive units of a good yield smaller and smaller amounts of marginal, or extra, utility, then the consumer will buy additional units of a product only if its price falls True or false: If successive units of a good yield smaller and smaller amounts of marginal utility, then the consumer will buy extra units of the good only if its price rises. Which of the following does the idea of diminishing marginal utility help to explain? The law of demand; how consumers allocate their income. How diminishing marginal utility underlies the law of demand can be summarized as follows: even when we like a particular good or service, we like additional successive unit of it: Less and less If Sue will only buy apples if the price decreases because each apple yields a smaller amount of additional satisfaction, she is exemplifying the law of: diminishing marginal utility The concept of diminishing marginal utility explains how consumers allocate their income among the many goods and services available for purchase.

The Law of Diminishing Marginal Utility and Consumer Behavior In which of the following ways does the law of diminishing marginal utility support and exemplify consumer behavior? A downward-sloping demand curve

Consumer Behavior In the theory of consumer behavior, we assume that each consumer has clear-cut preferences for specific goods and services that are available in the market. True or false: The theory of consumer behavior assumes that, with unlimited income and a set of product prices, consumers make rational choices on the basis of well-defined preferences. The theory of consumer behavior assumes that, with limited income and a set of product prices, consumers make rational choices on the basis of well-defined preferences. The theory of consumer behavior assumes: that with limited income and a set of product prices, consumers make rational choices on the basis of well-defined preferences. The theory of consumer behavior can explain: many real-world phenomena True or false: With respect to consumer behavior, consumers are not interested in variety.

Marginal Utility Marginal utility is the change in total utility that results from the consumption of one more unit of a product. In addition to liking a particular good or service, recent research has determined that variation is important to consumers and will cause marginal utility to set in more slowly. Marginal utility is the extra satisfaction or pleasure a consumer realizes from consuming an additional unit of a particular product. The marginal utility of product A divided by the price of A should be equal to the marginal utility of product B divided by the price of B. Page: 119 Summarize why a firm would have to pay the consumer to consume an additional unit of a good when the marginal utility for that good turns negative. A consumer will need to be paid to consume extra units of a product if the marginal utility is negative.

Total Utility Total utility is the total amount of satisfaction or pleasure a person derives from consuming some specific quantity. Which of the following does total utility refer to? Amount of satisfaction from a good or service Total utility is the full amount of satisfaction or pleasure a person derives from consuming some specific quantity, for example, 10 units of a good or service. As more of a product is consumed, total utility rises at a diminishing rate, reaches a maximum, and then falls. Page: 123 Paraphrase how new products succeed by enhancing consumers total utility. All of the following reflect how new products succeed, except: through price floors established by legislation.

Maximizing Total Utility Individuals take actions to maximize their total utility. Which of the following are three actions that support this proposition as stated in McConnell? Obtaining cash refunds or exchanges; Re-gifting; Setting up gift registries A consumer will switch toward a product with a higher MU/P and away from a product with a lower MU/P, in order to maximize total utility.

Maximizing Total Utility and Rational Behavior When consumers want to get the most for their money or, technically, to maximize their total utility, they are said to be engaging in: rational behavior

Page: 125 - Explain why cash gifts are preferred than non-cash gifts. Cash gifts are preferred over non-cash gifts because: non-cash gifts may not match the recipient preferences and maximize total utility

Marginal Utility and Total Utility When marginal utility is negative, as an extra unit of a good is consumed then total utility is: falling Total utility is the collective amount of satisfaction derived from consuming some specific quantity and marginal utility is the change that results from the consumption of additional units of a product. Demonstrate the total utility of consumption increasing at a decreasing rate while simultaneously the marginal utility of consumption declines; calculate the marginal utility associated with successive units of consumption and articulate why consumers behave in ways that make demand curves slope downward. Which of the following demonstrate total utility of consumption increasing at a decreasing rate while simultaneously the marginal utility of consumption declines? An upward sloping total utility curve that reaches a peak and declines along with a downward sloping marginal utility curve Total utility for pizza is as follows: 1 pizza: 10 utils; 2 pizzas: 15 utils; 3 pizzas: 13 utils. What is the marginal utility between 1 and 2 pizzas? 5 utils The total utility curve is an upward sloping curve that increases at a decreasing rate, reaches a maximum and then declines while the marginal utility curve reflects the change in total utility and is illustrated by: a downward sloping curve that diminishes with increased consumption, and becomes zero when total utility is at a maximum

Page: 120 Recognize that the rational consumer must compare the extra utility from each product with its added cost or its price. True or false: The marginal utility of successive units of a good or service should always be compared against the added cost or price of the good or service. (Note: Rational consumers always consider the relationship between marginal or extra utility from successive units of a good versus the added cost.) Rational consumers must compare the marginal utility from each product with its added cost.

Rational Behavior Rational behavior assumes that a consumer will try to use his or her income to derive the maximum amount of total utility from it.

Utility Utility is subjective because: it varies widely from person to person. Utility is the satisfaction or pleasure one gets from consuming a good or service. Which of the following is a characteristic of utility? It is subjective; it is difficult to quantify; it is not synonymous with usefulness. True or false: Utility is subjective and easy to quantify. (Utility is difficult to quantify.) The utility of a specific product or service may vary widely from person to person therefore it is: subjective For illustration purposes, utility can be measured in terms of imaginary units called utils. True or false: The utility of a good is its power to satisfy peoples wants. (A consumer derives utility from a product if it can satisfy a want.)

Utility and Functionality Utility refers to the satisfaction or pleasure one gets from consuming a good or service, whereas functionality refers to the practical and functional use the good or service actually serves.

Water and Diamonds Page: 124 Differentiate between the cost of water and the cost of diamond per carat. All of the following identify why the price of water per gallon is lower than the price of a diamond per carat, except: water is in low supply relative to demand and thus has a very low price per gallon. The total utility of water is very high and the total utility of diamonds is low because the marginal utility of water is very low, while the marginal utility of diamonds is high. True or false: Water has a much lower total utility than diamonds and that is why the price of diamonds greatly exceeds the price of water. (Note: Water has much more total utility (usefulness) than diamonds and that is why the price of diamonds greatly exceeds the price of water.) All of the following describe why the total utility of water is very high and that of diamonds is low, except: the marginal utility of water is very high, while the marginal utility of diamonds is low Water is much more useful than diamonds, yet the price of water is much lower than the price of diamonds. This can be explained by the fact that, for a typical consumer, water has a much higher total utility or usefulness than diamonds. Consumers are willing to pay a much lower price for water than for diamonds because: the marginal utility of water is low while the marginal utility of diamonds is high. The marginal utility (MU) of the last unit of water consumed by a typical consumer is very low, whereas the (MU) of the last diamond purchased by a consumer is quite high.

Scarce Relative Which of the following describes why every good has a price? Goods are scarce relative to the demand for them. Which of the following drives home the reality of scarcity to each consumer? Consumers have limited amounts of money; goods are scarce relative to demand for them.

Utility-Maximizing Rule Page: 121 Summarize how economists generalize the utility-maximizing rule. Which of the following states that consumers will maximize their satisfaction if they allocate their budget so that the last dollar spent on good A, the last dollar spent on good B, and so forth, all yield equal amounts of marginal utility? The utility-maximizing rule Which of the following best describes the meaning of the utility-maximizing rule? To maximize satisfaction, consumers should allocate income so that the last dollar spent on each product yields equal amounts of marginal utility. The utility-maximizing rule requires which of the following to be true? That income be allocated so as to equalize the marginal utility per dollar spent on each good or service. Which of the following best summarizes the interaction between the demand curve and the utility-maximizing rule? A demand curve can be derived by changing the price of one product in the consumerbehavior model and noting the change in the utility-maximizing Qd. The downward sloping demand curve illustrates the declining nature of marginal utility because: each point on the demand curve meets the utility-maximizing rule and illustrates the inverse relationship between price and quantity demanded. Given the different combinations of goods and services a consumer can obtain within his or her budget, the utility-maximizing rule can determine the specific combination that will yield the most utility or satisfaction.

Utility-Maximization Model Page: 122 Discuss the relationship between the income and substitution effects and the utility-maximization model. Which of the following best describes the relationship between the income and substitution effects and the utility-maximization model? The utility-maximization model explains why demand curves are downsloping due to price declines.

Consumer Equilibrium Page: 120 Discuss the concept of consumer equilibrium. When a consumer has balanced his or her margins using the utility-maximizing rule, he or she has achieved consumer: equilibrium A consumer is initially at equilibrium, buying goods A and B. If the price of good A increases, while that of B stays the same, then the consumer restores equilibrium by buying more of good B and less of good A. The iPod disrupted consumer equilibrium because spending shifted from alternative products with a(n) lower marginal-utility-to-price ratio to iPods as a way to increase total utility.

Marginal-Utility-To-Price Ratio The marginal-utility-to-price ratio is the marginal utility of any product divided by the price of that product.

Marginal-Utility Analysis Marginal-utility analysis supports the use of cash over non-cash gift cards. Which of the following supports the use of cash gift cards over non-cash gift cards? Marginal utility analysis

Budget Constraint All of the following are characteristic of the concept of a budget constraint, except: it does not apply to the super wealthy. True or false: A budget constraint is more severe for a consumer with an average income than for a consumer with a high income. Which of the following best describes the concept of a budget constraint? At any time, consumers earn a fixed and limited income because they supply a finite amount of human and property resources to society True or false: A budget constraint is more severe for a consumer with an average income than for a consumer with a high income.

Budget Limitation A budget limitation is more severe for a consumer with an average income than a consumer with a high income

Substitution Effect The substitution effect is the impact that a change in a products price has on its relative expensiveness. The substitution effect impacts: the consumers ability to buy a particular product because of its relative expensiveness to similar products. The substitution effect contributes to the inverse relationship between price and quantity demanded that is illustrated along the demand curve. Which of the following contributes to the inverse relationship between price and quantity demanded that is illustrated along the demand curve for a normal good? Substitution effect; income effect

Income Effect The income effect is the impact that a change in product price has on the consumers real income; hence, it affects the quantity demanded as well. An increase in real income caused by a reduction in the price of a product will allow consumers to buy more of that product. Therefore, this income effect helps explain why the demand curve slopes downward. True or false: The law of demand can be explained through the income and repetition effects.

The Endowment Effect The tendency that people have to put a higher valuation on anything that they currently possess than on identical items that they do not own is called: the endowment affect Loss averse explains the endowment effect. The endowment effect is the tendency that people have to put a higher valuation on anything that they currently possess than on identical items that they do not own.

The Anchoring Effect Which of the following refers to irrelevant information unconsciously influencing peoples feeling about the status quo? Anchoring effect The anchoring effect refers to irrelevant information unconsciously influencing peoples estimates about the value of goods and services.

Framing Effect Framing effects are important to recognize because they can be manipulated by advertisers, lawyers and politicians in order to alter peoples decisions. Changes in peoples preferences that are caused by new information altering their sense of whether situations are gains or losses is referred to as: framing effects

Marginal Utility Per-Dollar-Spent

The formula for the marginal utility per-dollar-spent of a product is the marginal utility of the product divided by its price. (Note: price should not be confused with cost. The cost is the value associated with the production of a good or service. The Price reflects that cost, but usually always includes a premium paid by consumers.) Page: 120 Explain why marginal utilities must be put on a per-dollar-spent basis. Which of the following reasons explains why marginal utilities must be put on a per-dollar-spent basis? To make the amounts of extra utility derived from differently priced goods comparable. Marginal utilities are expressed in a per-dollar spent basis in order to make the amounts of extra utility derived from differently priced goods comparable. In comparing two products, a decrease in the price of one product raises/increases the marginal-utility-per-dollar spent on it, and the consumer will therefore buy more of it.

The Method of Payment Page: 125 Exemplify the effects resulting from the method of payment for certain goods and services. Suppose your monthly health premiums covers 90% of all your health care cost. Therefore, each time you require health care, the cost to you is 10% of the actual market price. You consider that it is rather inexpensive for you to purchase health care and seize the opportunity to visit the doctor any opportunity that you get. Purchasing more health care than you would if confronted with the full price exemplifies the effects due to: the method of payment Which of the following affects prices at the time they are purchases and significantly changes the amount purchased? The method of payment

Time A retiree would find it much cheaper to take the bus than fly to another city, whereas a corporate executive would find it cheaper to fly than take the bus. This makes perfect sense once we account for the value of time. Page: 124 Summarize that a high productivity of labor gives time a high market value in an advanced society. Americans who visit developing countries often find that time is used casually whereas material goods are highly prized in those countries. This reflects the fact that: productivity of labor is low in those countries, therefore time has a low value. Recall that time, to a consumer, is a valuable economic commodity.

Opportunity Cost Opportunity cost refers to the highest valued alternative that is given up in order to engage in one activity instead of another. Opportunity cost refers to: the highest valued alternative that is given up in order to engage in one activity over another All of the following exemplify the opportunity cost of attending college, except: the professors salaries

Opt in, Opt Out Page: 124 Discuss what is meant by opt in. Recall that opt in referred to participation in: retirement savings programs where workers were automatically excluded and had to register to join

Page: 124 Recognizing that governments have instituted public policies designed to counter the reality that young people do not take saving for retirement very seriously. Young people take saving for retirement less seriously than older people. To counter this, the government recently passed legislation encouraging employers to change retirement savings programs from an opt in to an opt out system.

Problems The price of an apple is $2.00. The first apple has a marginal utility of 10 utils, while the second apple has a marginal utility of 8 utils. The marginal utility per dollar for the first apple is 5 utils and the marginal utility per dollar for the second dollar is 4 utils.

According to this figure, what could cause the quantity demanded for oranges to increase from four to six? The price of oranges has to fall to $1 Calculate the marginal utility per dollar for the following goods: If the price of taco is $2.00 and the marginal utility is 18 utils, then the marginal utility per dollar equal 9. If the price of pizza is $4.00, and the marginal utility is 24 utils, then the marginal utility per dollar equals 6. Bettys total utility from consuming one taco is 10 utils. After consuming her second taco, her total utility rises to 19 utils. The marginal utility of the second taco is 9 utils.

Consumers Choices, Tastes, and Preferences Which of the following best describes consumer choice in relation to preferences for goods and services? Consumers have a good idea of how much marginal utility they will get from successive units of various products they might purchase. A consumer prefers the compactness and large data storage capacity of an iPod over a CD. Which determinant of demand does this reflect? Consumer tastes A consumers choices are influenced by all, except: costs of production True or false: Consumers taste is a determinant of demand. Consumer choice is influenced not only by the marginal utility that extra units of a good will yield, but also by how much income must be given up to obtain extra units of the good.

Good and Bad Which of the following reveal interesting facts about how individuals react to good and bad occurrences? Individuals experience diminishing marginal dis-utility for losses; Good and bad events are judged in relative terms to the status quo; Individuals experience diminishing marginal utility for gains; Individuals are loss adverse Behavioral economics deals with the occurrence of bad things as well as good things.

Demand Curve An individuals demand curve for a product shows how much of the product the individual will purchase at various prices. Which of the following best describes how a consumers demand schedule or curve can be derived? By considering alternative prices at which a good or service might be sold and then determining the quantity a consumer will purchase.

Others Some essential goods have much cheaper prices than some unimportant goods. True or false: All essential goods naturally carry a higher price tag than goods that are considered unimportant or not needed or required to live.

Which of the following form the basis of prospect theory? Individuals are loss adverse; individuals experience diminishing marginal disutility for losses; good and bad events are judged in relative terms to the status quo; individuals experience diminishing marginal utility for gains

Evaluation consumption option in isolation rather than simultaneously is referred to as mental accounting. Evaluating consumption options in isolation rather than simultaneously is referred to as: mental accounting

Which of the following is an important factor explaining todays high expenditures on health care? Financing health care through insurance

Page: 117 Explain why differences in marginal utility lead to alternative forms of vending machines for newspapers and soft-drinks. Which of the following best highlights the reason for different vending techniques of newspaper publishers and soft-drink firms? They use different vending techniques because of the highly different rate of decline in marginal utility for their products.