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Class_7_worksheet - that good 3 The Rational Spending Rule...

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Economics 101 P. Conway, Fall 2011 In-class worksheet, Class 7 1. The Law of demand: people do less of what they want to do as the price of doing it rises. You discovered Zipcar in your first week on campus – what a deal! You rent the car for $8.75 an hour, and then you don’t have to worry about parking. If they raise the cost to $10.00 an hour, will you use the Zipcar as much? Definitely not more. Possibly the same if you really need it (you would have an inelastic demand). Likely Less. 2. Utility is the satisfaction people derive from their consumption activities. Do you get more utility from drinking “fair trade” coffee than from drinking coffee not labeled as “fair trade”? Depends on the person. Do they value fair trade morally? If so, then yes there is added utility. How is the concept of utility related to the concept of buyer’s reservation price?
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In-class worksheet, Class 7 2 2 As utility for a good increases, the buyer will be willing to pay more for
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Unformatted text preview: that good. 3. The Rational Spending Rule: Spending should be allocated across goods so that the marginal utility per dollar spent is the same for each good. You and Bill Gates have two things in common – you both saw the movie “Inception” twice in the theater, and you both have one Starbucks coffee each morning. Does this mean that you and Bill Gates have the same marginal utility for these? No. It varies from person to person. 4. When the price of a good goes up, substitutes for that good become relatively more attractive, causing some consumers to purchase less of that good. Is having dinner at Spanky’s a substitute for a plane ticket home? Explain. No. They don’t really replace each other and are not similar products. However they both factor in to your budget so they are related in a way (Substitution effect) – purchasing one thing means purchasing less of another....
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