...means understanding the role utility plays in the demand price of a good by differentiating between total utility and marginal utility. The diamond-water paradox poses the perplexing observations: Even though water is obviously important to human activity (life cannot exist without water), the price of water is relatively low. Alternatively, diamonds are clearly much less important to human existence, but the price of diamonds is substantially higher. In other words, the utility obtained from water is obviously very great, while the utility obtained from diamonds is substantially less. The key question that arises is: Why are diamonds so much more expensive than water? Total and Marginal Insight into, and clarification of, the diamond-water paradox results by differentiating between total utility and marginal utility. Total Utility: This is the overall satisfaction of wants and needs obtained from consuming a good. That is, total utility is the accumulated amount of satisfaction, or the total value, generated by several units of a good. Marginal Utility: This is the extra satisfaction of wants and needs obtained from consuming one additional unit of good. That is, marginal utility is the incremental satisfaction generated by, and the value of, a single unit of a good. Water provides humans with an enormous amount of total utility. Water satisfies A LOT of wants and needs for A LOT of people. Water provides a high level of total utility because it is plentiful--water...
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...Utility" is an economic term introduced by Daniel Bernoulli referring to the total satisfaction received from consuming a good or service. Total utility (TU) is defined as the total amount of satisfaction that a person can receive from the consumption of all units of a specific product or service. Marginal utility (MU) is defined as the additional utility gained from the consumption of one additional unit of a good or service In economics, the utility function measures welfare or satisfaction of a consumer as a function of consumption of real goods, such as food, clothing and composite goods rather than nominal goods measured in nominal terms What is 'Utility' "Utility" is an economic term introduced by Daniel Bernoulli referring to the total satisfaction received from consuming a good or service. The economic utility of a good or service is important to understand because it will directly influence the demand, and therefore price, of that good or service. A consumer's utility is hard to measure, however, but it can be determined indirectly with consumer behavior theories, which assume that consumers will strive to maximize their utility. BREAKING DOWN 'Utility' Classical economists operate under the assumption that all utilities can be measured as a hard number. To help with this quantitative measurement of satisfaction, the designation of a util was created to represent the amount of psychological satisfaction a specific good or service generates, for a subset of...
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... 3. If a person consumes fewer units of a good, will marginal utility of the good increase as total utility decreases? Why or why not? Yes, it will, as long as the marginal utility of the units of the good no longer consumed was not negative. To illustrate, suppose the situation is as shown in Exhibit 1a. If the consumer consumes 5 units of good X, total utility is 40 utils and marginal utility is 6 utils. If she consumes one less unit of good X, or 4 units, total utility drops to 34 utils but marginal utility rises to 7 utils. (5 points) 4. If the marginal utility of good A is 4 utils and its price is $2 and the marginal utility of good B is 6 utils and its price is $1, is the individual consumer maximizing (total) utility if she spends a total of $3 buying one unit of each good? If not, how can more utility be obtained? The individual consumer is not maximizing utility. She is receiving 2 utils per dollar spent on good A and 6 utils per dollar spent on good B. She can increase her utility by purchasing more of good B (the good for which she receives more utility per dollar) and less of good A (the good for which she receives less utility per dollar). (5 points) 1. The marginal utility for the third unit of X is 60 utils and the marginal utility for the fourth unit of X is 45 utils. If the law of diminishing marginal utility holds, what is the minimum total utility? We can’t tell for certain, except that it is...
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...(sodas, candy, snacks, etc.) at one time. Using the concept of marginal utility, explain why these vending machines differ? After taking the first newspaper from the newspaper vending machine, the marginal utility for multiple newspapers is zero. Reason: all newspapers are identical (one item); you don’t learn any more news by taking more than one newspaper. If the newspaper vending machine allowed you to pay for one newspaper and take multiple newspapers, you wouldn’t. For vending machines that dispense more than one item, the marginal utility is positive. Reason using a Coke vending machine example: after drinking the first Coke, the second will still provide more utility. It will provide less utility than the first Coke but the marginal utility of the second Coke is still positive (diminishing marginal utility). If the Coke vending machine allowed you to pay for one Coke and take multiple Cokes, you would. Therefore, the Coke vending machine is designed to dispense one Coke after you pay for one Coke. . 2. Amy is shopping at a dollar store. She is currently buying 5 bracelets that cost $1 each and 4 sodas that cost $1 each. The table below indicates the marginal utility she obtains when she purchases this combination. | Quantity | Marginal Utility | Bracelets | 5 | 30 | Sodas | 4 | 40 | a. Is this consumer maximizing his/her utility? There are two rules associated with utility maximization: 1. The entire budget (income) must be spent. ...
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...Which of the following is not a determinant of demand? Desire for the good. Income of the consumer. The cost of the factor inputs. The price of other goods. An individual's demand for a specific product is determined by tastes, income, expectations (for income, prices, tastes), and the availability and price of other goods. The cost of the factor inputs is a determinant of supply. Multiple Choice 3. Learning Objective: 1901 Why demand curves are downward sloping. awar d: 10 out of 10.00 points Graphically, as a consumer buys more of a good, the marginal utility line will Increase as more goods are consumed. Increase steadily and then decline. Continuously decline if diminishing returns are present. Follow the same shape as the total utility line. Total utility increases as a consumer enjoys more units of a product. Due to the law of diminishing marginal utility, marginal utility declines. Multiple Choice 4. Learning Objective: 1901 Why demand curves are downward sloping. awar d: 10 out of 10.00 points When economists refer to the determinants of demand, they are referring to factors that Cause a movement down a demand curve. Cause the demand curve to shift left or right. Influence producer behavior. Cause a movement up one demand curve. A movement up or down a demand...
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... I. Law of Diminishing Marginal Utility A. Although consumer wants in general are insatiable, wants for specific commodities can be fulfilled. The more of a specific product that consumers obtain, the less they will desire more units of that product. This can be illustrated with almost any item. The text uses the automobile example, but houses, clothing, and even food items work just as well. B. Utility is a subjective notion in economics, referring to the amount of satisfaction a person gets from consumption of a certain item. C. Marginal utility refers to the extra utility a consumer gets from one additional unit of a specific product. In a short period of time, the marginal utility derived from successive units of a given product will decline. This is known as diminishing marginal utility. D. Figure 7.1 (Key Graph) and the accompanying table illustrate the relationship between total and marginal utility. 1. Total utility increases as each additional tacos is purchased through the first five, but utility rises at a diminishing rate since each tacos adds less and less to the consumer’s satisfaction. 2. At some point, marginal utility becomes zero and then even negative at the seventh unit and beyond. If more than six tacos were purchased, total utility would begin to fall. This illustrates the law of diminishing marginal utility. E. CONSIDER THIS … Vending Machines and Marginal Utility 1. Newspaper...
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...“CONSUMER BEHAVIOR AND UTILITY MAXIMIZATION” In this chapter, we will learn: • About total utility, marginal utility, and the law of diminishing marginal utility. • How individual consumer allocates their incomes among the various goods and services available to them. • How rational consumers compare marginal utility-to-price ratios for products in purchasing combinations of products that maximize their utility. LAW OF DIMINISHING MARGINAL UTILITY -This principle is the added satisfaction declines as a consumer acquires additional units of a given product. In a specific span of time over which consumers’ tastes remain unchanged, consumers can obtain as much of a particular good or service as they can afford. But the more of that product they obtain, the less they want still more of it. UTILITY - Is want- satisfying power. The utility of good or service is the satisfaction or pleasure one gets from consuming it. - TOTAL UTILITY and MARGINAL UTILITY TOTAL UTILITY - Is the total amount of satisfaction or pleasure a person derives from consuming some specific quantity- for example, 10 units of good or services. MARGINAL UTILITY - Is the extra satisfaction a consumer realizes from an additional unit of that product. • Alternatively, Marginal Utility is the change in total utility that results from the consumption of 1 more unit of a product. MARGINAL UTILITY and DEMAND - the law of diminishing marginal utility explains why the demand curve for a given product...
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...Honors Economics-Mr. Doebbler-Chapter 6 Study Guide Chapter6: Consumer Behavior p. 116 AFTER READING THIS CHAPTER, YOU SHOULD BE ABLE TO: | 1 | Define and explain the relationship between total utility, marginal utility, and the law of diminishing marginal utility. | 2 | Describe how rational consumers maximize utility by comparing the marginal utility-to-price ratios of all the products they could possibly purchase. | 3 | Explain how a demand curve can be derived by observing the outcomes of price changes in the utility-maximization model. | 4 | Discuss how the utility-maximization model helps highlight the income and substitution effects of a price change. | 5 | Relate how behavioral economics and prospect theory shed light on many consumer behaviors. | 6 | (Appendix) Relate how the indifference curve model of consumer behavior derives demand curves from budget lines, indifference curves, and utility maximization. | If you were to compare the shopping carts of almost any two consumers, you would observe striking differences. Why does Paula have potatoes, peaches, and Pepsi in her cart, while Sam has sugar, saltines, and 7-Up in his? Why didn't Paula also buy pasta and plums? Why didn't Sam have soup and spaghetti on his grocery list? In this chapter, you will see how individual consumers allocate their incomes among the various goods and services available to them. Given a certain budget, how does a consumer decide which goods and services to buy? This...
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...Based on the marginal utility theory to analyze students’ demand for… 1. Introduction:.….…………………………3 1.1 Origin of Marginal Utility Theory………………………….3 1.2 Development of Marginal Utility Theory…………………..3 2. The analysis of marginal utility theory...4 2.1 The definition of marginal utility theory………...…………4 2.2 The understanding of marginal utility theory………...……5 2.3 The main influences on marginal utility……….……………5 2.4 The paradox of water and diamonds………………………..8 3. Discussion on marginal utility theory….8 3.1 The limitation of marginal utility theory………………….8 4. Conclusion………………………………..9 5. Reference………………………………..10 1. Introduction 1.1 Origin of Marginal Utility Theory The origin of marginal utility theory can date back to Aristotle. It is widely considered that Aristotle was the first man to bring forward the idea of value in use. He pointed out that goods gain their value from personal utility, scarcity and costs. And an increase in a specific good will bring an decrease in value and the value can even become a negative one. This is the original form of the principle of diminishing marginal utility. The term marginal utility was first used in this connection by the Austrian Wieser. (Marshall Alfred 1920 Principles of economics chapter Ⅲ.Ⅲ ,p14) Adopted by Prof. Wicksteed, it corresponds to the term Final used by Jevons. His list of anticipators of his doctrine is headed by Gossen...
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...Chapter 7 7. Quantity of customers per hour | Marginal Cost of customer | Marginal Benefit of customer (a) | Marginal Benefit of customer (b) | 0 | 14 | | | 1 | | 15.25 | 16.25 | 2 | 14.5 15 | 15.25 | 16.25 | 3 | | 15.25 | 16.25 | 4 | 15.516 | 15.25 | 16.25 | 5 | | 15.25 | 16.25 | 6 | 16.517 | 15.25 | 16.25 | 7 | | 15.25 | 16.25 | a) The marginal benefit of each customer is $15.25: each additional customer you admit increases the total benefit to the gym by $15.25. So you should admit three customers per hour. Suppose you currently admit no customers. Admitting the first customer gives the gym a marginal benefit of $15.25 and a marginal cost of $14.00. Since the marginal benefit of that first customer exceeds the marginal cost, you want to admit the first customer. For the second customer, the marginal benefit ($15.25) also exceeds the marginal cost ($14.50), so you want to admit the second customer, too. The same is true for the third customer: the marginal benefit ($15.25) exceeds the marginal cost ($15.00), so you also want to admit the third customer. For the fourth customer, however, the marginal cost ($15.50) exceeds the marginal benefit ($15.25), so you do not want to admit a fourth customer. b) By reasoning similar to that...
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...Practice Exam Two (5,6,19,11,12) Student: ___________________________________________________________________________ 1. The Katrina disaster in New Orleans decreased the ability of oil companies to purify crude oil into gasoline. This caused: A. the supply curve for gasoline to shift inward. B. the supply curve for gasoline to shift outward. C. the quantity of gasoline demanded to move out along the demand curve. D. the quantity of gasoline supplied to move in along the supply curve. 2. Suppose the price of tomatoes dramatically increases. Which of the following could cause this change? A. Hurricanes during the late summer damages the Florida crop, shifting supply left B. A reduction in tariffs of tomatoes from Central American, shifting supply right C. A news report stating that a pesticide used on tomatoes might cause cancer, shifting the demand to the right D. Advertising for catsup increases demand for catsup, shifting the demand curve to the left 3. An increase in price and decrease in quantity are consistent with a: A. leftward shift in demand and no shift in supply. B. leftward shift in supply and no shift in demand. C. rightward shift in supply and a rightward shift in demand. D. rightward shift in supply and a leftward shift in demand. 4. An increase in quantity and an indeterminate change in price are consistent with a: A. leftward shift in demand and supply. B. rightward shift in supply and demand. C. rightward shift in supply, keeping...
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...and Utility Maximization – Lecture 9 Income & Substitution Effect: * We have earlier mentioned to explanations for the downward sloping demand curve: * Income & Substitution Effect – Purchasing Power * Law of Diminishing Marginal Utility (DMU) * The income effect is the impact that a change in the price of a product has on a consumer’s real income and consequently on the quantity demanded of that good. * The substitution effect is the impact that a change in product’s price has on its relative expensiveness and consequently on the quantity demanded. The cheaper the product is, the more attractive it becomes. * Income and substitution effect combine to increase consumer ability and willingness to buy a product as price falls Law of Diminishing Marginal Utility: * A second explanation of the downward sloping demand curve is that although consumer wants in general may be insatiable, wants for particular commodities can be satisfied. * In a specific span of time over which consumer’s tastes remain unchanged, consumers can get as much of a particular good or service as they can afford. * But the more of that product they obtain, the less they want still more of it. * This is the Law of DMU that causes the demand curve to be downward sloping. Utility: * A product has utility if it can satisfy a want. * Utility is want-satisfying power. * Important points to keep in mind regarding utility: * Utility and...
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...besa44438_ch03.qxd 10/12/04 5:45 PM Page 68 3 3.1 3.2 C H A P T E R CONSUMER PREFERENCES AND THE CONCEPT OF UTILITY R E P R E S E N TAT I O N S OF PREFERENCES UTILITY FUNCTIONS APPLICATION 3.1 APPLICATION 3.2 APPLICATION 3.3 APPLICATION 3.4 Influencing Your Preferences How People Buy Cars: The Importance of Attributes Taste Tests Hula Hoops and Pet Rocks Why Do You Like What You Like? If you are thinking about buying a car, your choices can be overwhelming: Should you buy or lease? New car or used? A sport utility vehicle, a sedan, a sports car, or a minivan? Should you get a sunroof or four-wheel drive? How much extra would you pay for a vehicle that will have a high resale value in the future? What are the expected operating expenses for each model—insurance, repairs, gasoline, and so on? Finally, what opportunities will you forgo if you buy a car? How else could you spend your money, either today or in the future? Making decisions about a product with many options is not easy. Before buying a car, for example, you might draw on the experiences of friends and family, read advertisements, visit dealers, and test-drive vehicles. You might also research different models and financing options on the Web, read Consumer Reports, price insurance rates for favorite models, or even visit chat rooms frequented by car buffs. As a consumer, you make choices every day of your life. Besides choosing among automobiles, you must decide what kind of housing to rent...
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...March 16, 2016 Chapter 6 and answer the following questions: 1. (Law of Diminishing Marginal Utility) Some restaurants offer “all you can eat” meals. How is this practice related to diminishing marginal utility? What restrictions must the restaurant impose on the customer in order to make a profit? (Answers may vary) The marginal utility derived from each additional plate of food will diminish as you become full. The marginal utility will continue to decrease until it reaches zero or becomes negative. Food shows diminishing marginal utility after a certain amount has been consumed. The restaurant must require that the consumer not take food home and that the consumer not share the meal with others at the table. 2. (Marginal Utility) Is it possible for marginal utility to be negative while total utility is positive? If yes, under what circumstances is it possible? Yes, it is possible. Total utility rises as long as marginal utility is positive. When total utility starts to drop, marginal utility becomes negative. Total utility is still positive as long as the negative marginal utilities are not sizable enough to completely offset the positive marginal utilities on earlier units of consumption. 3. (Role of Time in Demand) In many amusement parks, you pay an admission fee to the park but you do not need to pay for individual rides. How do people choose which rides to go on? (Answers may vary) The rides are allocated on the basis of the time costs incurred while...
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...Title: Utility 2, Cardinalists and Ordinalists I. Objective: Students will know 1. Cardinalists method for measuring utility 2. Ordinalists method for measuring utility II. Materials III. Procedure Warm Up: Ask Students; if you were hungry, how many bowls of borsch might you eat? Would the second bowl be as satisfying as the first? Would you want a third bowl or a fourth? 1. Cardinalists method for measuring utility A. Review of terms Utility: (корисність) Benefits consumers obtain from the goods and services that they consume. Total Utility: The amount of benefit consumer obtains from the entire consumption of a product. Marginal Utility: The increase of total utility a consumer obtains from an additional (marginal) unit consumed. Indifference Curve: A line representing different bundles of goods and services, each yielding the same level of total utility. B. Graphical Explanation First looking at one item, Borsch. Total utility (TU) is a function of the amount of borsch (X) consumed TUX = f(X) Marginal Utility (MU) can be found by dividing the change in total utility by the change in the quantity of borsch. MUX = ∆TUX / ∆X Law of Diminishing marginal utility: The marginal utility of a good declines as more of it is consumed in a given time period. [pic] Each bowl of borsch provides less utility. By the seventh bowl marginal utility is zero, you would be just as well off without it. By the eighth bowl MU is negative...
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