SM_Econ_08_Micro_ch08 - Chapter 8 UTILITY AND DEMAND...

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A n s w e r s t o t h e R e v i e w Q u i z z e s Page 186 1. What is utility and how do we use the concept of utility to describe a consumer’s preferences? Utility is the benefit a person gets from the consumption of goods and services. We use utility to describe a consumer’s preferences primarily by using the gain in utility from consuming another unit of a good or service. 2. What is the distinction between total utility and marginal utility? Total utility is the entire amount of satisfaction an individual obtains from the total amount of goods and services consumed. Marginal utility is the change in total utility from a one-unit increase in the consumption of a good or service. 3. What is the key assumption about marginal utility? Generally, more consumption gives more utility. A key assumption about marginal utility is that it generally declines as more units of the good are consumed. This assumption is the principle of diminishing marginal utility. 4. What two conditions are met when a consumer is maximizing utility? The two conditions that must be met to ensure that a consumer is maximizing his or her utility are: i) all available income is spent, and ii) the marginal utility per dollar spent is equal for all goods and services consumed. 5. Explain why equalizing the marginal utility per dollar from each good maximizes utility. Equating the ratio of marginal utility per dollar for each good and service consumed maximizes utility because it measures the utility gained when an additional dollar of a good or service is consumed. This allows the consumer to weigh the utility gained from additional consumption of a dollar’s worth of one good against the utility lost from the forgone consumption of a dollar’s worth of another good. When the marginal utility per dollar for each good and service is equalized, there is no additional utility available from any other consumption combination. Page 192 1. When the price of a good falls and the prices of other goods and a consumer’s income remain the same, what happens to the consumption of the good whose price has fallen and to the consumption of other goods? When the price of a good falls, the marginal utility per dollar for that good increases. The marginal utility per dollar for other goods does not change. To maximize total utility, a consumer makes marginal utility per dollar equal for all goods, so the consumer buys more of the good that has experienced the fall in price. Because more of the good is purchased, the marginal utility of that good decreases, so the marginal utility per dollar of that good falls. And because the consumer 8 UTILITY AND DEMAND C h a p t e r
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1 3 6 buys less of other goods, the marginal utility of those goods increases, which increases their marginal utility per dollar. 2.
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SM_Econ_08_Micro_ch08 - Chapter 8 UTILITY AND DEMAND...

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