101_PS5_ans_03 - Econ 101 Answers for Problem Set 5 Answers...

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Econ 101 Answers for Problem Set 5 Answers to Review Questions 1. To say that someone needs a good is to suggest that he cannot choose to do without the good or buy a substitute for it. We are more likely to be mindful of the fact that almost all goods have substitutes if we speak of wants rather than needs. 2. Even though we cannot actually measure utility directly, the marginal utility model helps us gain a better understanding of how a rational consumer would allocate her income among different goods. 3. The law of diminishing marginal utility says that the first units we consume of a good deliver the highest “bang for the buck,” and this means that we can generally achieve higher utility by spreading our incomes over many goods than by concentrating them on only a few. 4. A scarce good must be rationed in one way or another. If its monetary price is zero, people will either have to wait in line for it, as in the free ice cream example, or pay a bribe, or incur some other cost to gain access to it. 5. Many people report that they didn’t like spicy food the first time they ate it, or didn’t like a certain comedian the first time they heard him. But on repeated exposure, they often find that they like these experiences more and more. Answers to Problems 1. Because willingness to pay for food quality is likely to be an increasing function of income, we expect patrons of the gourmet restaurant to have higher incomes, on average, than the patron of the diner. And since willingness to pay for service is also likely to be an increasing function of income, we expect higher service quality in the gourmet restaurant.
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This note was uploaded on 03/27/2008 for the course ECON 1110 taught by Professor Wissink during the Spring '06 term at Cornell University (Engineering School).

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101_PS5_ans_03 - Econ 101 Answers for Problem Set 5 Answers...

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