Homework 2 for discussion section

# Homework 2 for discussion section - HOMEWORK 2 ANSWERS AND...

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HOMEWORK 2 ANSWERS AND EXPLANATIONS

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A util represents a unit of measurement for the: • dollars a consumer spends on a good. No, that is measure with total expenditure • profit a firm makes from producing a good. No, that is not relevant to the consumer • way a consumer will respond to a change in price. No, this is elasticity • happiness a person obtains from consuming a good. Yes, util is a measurement unit of the happiness . • way a producer will respond to a change in price. No this is the supply elasticity.
The term utility refers to the: • usefulness of a good in relation to its scarcity. No, usefulness may be different from scarcity • necessity of a good. No, necessity may be externally imposed • price of a good. No, the price is set by the market • number of goods a consumer has. No, welfare is not measure by number of goods • pleasure or satisfaction a consumer receives upon consuming a good. Yes, it is the satisfaction from consumption

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The marginal utilities associated with the first 4 units of consumption of good Y are 10, 12, 9, and 7, respectively. What is the total utility associated with the third unit? Quantity 1 2 3 4 Marginal 10 12 9 7 Total Utility 10 22 31 38 Utility Diminishing marginal returns: Utility is increasing at a decreasing rate BE CAREFUL: Do not get confused with Marginal Utility and Average Utility
Consumers tend to maximize: • marginal utility. No, Marginal Utility is a change rate • marginal utility per dollar. No, this is an incomplete statement total utility. Yes, individuals look for the maximum joy • money holdings. No, money holdings may bear a cost (interest rate) • consumer surplus. No, the surplus depends on the market

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Utility Maximum Utility To understand the consumption of a good Remember that the utility is Measured in “utils” Gelato Cups GC* Increasing utility: More consumption Decreasing utility: Less consumption
Marginal Utility In Happiness, having more of something is better! Why Marginal Utility decreases? Gelato Cups GC* Positive Marginal Utility What about Satiation? Negative Marginal Utility

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Utility theory assumes that marginal utility: • increases as an individual consumes more of a product. No, it violates law of diminishing marginal returns • decreases as an individual consumes more of a product. Yes, this is law of diminishing marginal returns • is zero as long as the individual derives utility from the product. If zero, then no “the more the better”
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Homework 2 for discussion section - HOMEWORK 2 ANSWERS AND...

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