Problem Set

Macroeconomics
• Macro economics by Kevin Dooley available under a CC BY 2.0 License.
◦ The problem set each week provides a worthwhile review and tests you on concepts in order to assess your acquisition of knowledge. This
week you will work on Utility Maximization problems.

Activity Details
Watch Jacob Clifford's Micro 2.11 Utility Maximization and answer the following questions.

1. How do economists describe satisfaction?

• Economist describe satisfaction as optimal marginal utility. This is when the consumer gets the best deal out of their income by
determining if the marginal utility has the highest utils, and both of the products have equal marginal utility per dollar.

2. Describe the shape of a total utility (TU) curve. Show it in a graph.

• The shape of the TU curve is like an upside down U shape.

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3. Describe the shape of marginal utility (MU) curve. Show it in a graph.
The MU curve is a linear downsloping line.
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4. What is the mathematical formula for marginal utility?

. What principle gives the total utility curve its shape?

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• The principle to give total utility curve its shape is that a person satisfaction has a limit, and when that limit is passed, there is a
decrease in satisfaction, this causes a U shape from the increase to decrease. The highest point of the line is the highest satisfaction
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one can get.

6. Why does a marginal utility curve slope the way it does?

• The marginal utility curve slopes the way it does because of the law of diminishing marginal utility. This law states that the more
of a good is consumed, the less utility it provides. And if too much is consumed, it can cause a negative effect on utility.

7. Explain why each unit of something that you consumed gives you less utility than the one before it.
• This is because in the law of diminishing marginal utility it states that there is a decrease in satisfaction when units are consumed.
And each unit, it decreases a little bit more. For example if I could eat 1 cookies I would have a high utility because it is the first
cookie, if I have a second cookie, I already know what it taste like, so it is less satisfying.

https://www.coursehero.com/file/32478852/AP-Economics-214-Problem-Setpdf/
 8. Using the data below and your knowledge from Mr. Clifford’s video, answer the questions that follow this chart showing the
marginal utility for goods A and B.

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If a consumer has $12 to spend, and the Price of Good A is $4 and the Price of Good B is $1?
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a. State the utility maximizing rule.

‣ The utility maximizing rule states that consumers should spend their income so that they get the
most marginal utility per a dollar, and the highest total utility.
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b. Set up the new columns in the chart and then determine how many units of Good A and how many
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units of Good B will the consumer buy? (2 points each column)

c. Explain how you determined the number purchased of A and B.

‣ I would purchase 4 units of good B and 2 units of good A because 4 units of B is 4 dollars and 2
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units of good A is 8 dollars so $4+$8=$12.00. Also they have equal marginal utility per dollar.
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9. You are given the following information: The price of cake is $2 and the price of cookies is $1. Complete the
missing information in the chart.

a. How many cakes and how many cookies will be bought with a budget of $10? Show your work. (1 point
each column)
• Three cakes and 4 cookies will be bought with a budget of $10.00.

https://www.coursehero.com/file/32478852/AP-Economics-214-Problem-Setpdf/
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https://www.coursehero.com/file/32478852/AP-Economics-214-Problem-Setpdf/

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