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TUTORIAL 5 - TUTORIAL 5 WEEK 6 DEMAND AND THE BENEFIT SIDE...

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TUTORIAL 5 WEEK 6 DEMAND AND THE BENEFIT SIDE OF THE MARKET Reading Text: Ch. 5 and Ch. 6 (pp146-151) Ch. 5 Review Questions: 2, 3, 4, 6, and 7 2. Even though we cannot actually measure utility directly, the marginal utility model helps us to 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’. This means that we can generally achieve higher total 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 sausage example, or pay a bribe, or incur some other cost to gain access to it. 6 When people are charged for water on the basis of how much they use, they will respond to an increase in its price in the same way that they would to an increase in the price of any other good. In particular, they will find ways of conserving water, by reusing and recycling and by adopting water-saving devices and production methods. 7 When the price of a good falls consumer surplus increases for two reasons. The first reason is that buyers who were previously purchasing the good at a higher price now enjoy a greater surplus. The second reason is that when the price of a good falls, more of it is sold; the additional units sold (except for the last one, for which price exactly equals the buyer’s reservation price) have a positive consumer surplus.
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