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ps05_sol

# ps05_sol - Q1 According to the Law of Diminishing Marginal...

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Q1.According to the Law of Diminishing Marginal Utility, A) If you consume less of something, your total utility from that consumption increases. B) If you consume more of something, the next unit you consume will deliver more utility than did the last unit you consumed. C) You should never consume any more of something after marginal utility has begun to diminish. D) If total utility is increasing as you consume more, then marginal utility must be increasing as well. E) Marginal utility tends to decrease when you consume more of the same item. Ans: e (by definition)

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Q6.If MU is positive as consumption increases, A) The consumer will not experience diminishing MU. B) Total utility will remain high and constant as consumption increases. C) Total utility will increase as consumption increases. D) The demand curve will necessarily have a positive slope. E) The demand curve will be a horizontal line. Ans: c
According to the Law of Diminishing MU, MU of the last unit will decrease as more units are consumed, holding other factors constant. However, that does not mean Total Utility will drop. MU can still be positive as it diminishes. As long as MU is positive, ↑ Q will ↑ TU.

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(A) is not true. No special assumptions on MU mentioned, so the usual Law of Dim MU assumption still holds. (B) is wrong as well. TU will not remain constant as we know that consumption of additional units brings positive MU (hence raising TU). (D) is incorrect. We certainly are not assuming increasing MU. (E) is implicitly assuming MU staying constant. As there is any special postulates made about MU, (E) is not the correct answer.
(C) is the correct answer. The satisfaction from each additional unit may come in a lower lever as consumption continues, nevertheless, more utility is generated. Total utility will always increase when MU is positive.

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Q2.After prices of beans have been reduced, consumption of beans falls. Why? A) The Sub Effect caused people to substitute noodles and rice for beans. B) The Income Effect caused people’s real income to fall, so they could no longer afford as much food. C) The Income Effect caused people’s real income to rise so they purchased less of what they considered to be inferior goods. D) Demand for beans is price inelastic. E) The only possible explanation is that people chose irrationally. Ans: c
(D) is obviously wrong because even if demand is price inelastic, Qd would still ↑ when P ↓ -- law of demand!! At the extreme situation that demand is perfectly price inelastic, Qd will be unchanged when P ↓.

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