Ch005_plus_App_4e

Ch005_plus_App_4e - Answers to Text Questions and Problems...

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Answers to Text Questions and Problems Answers to Review Questions 1. To say that someone needs a good is to suggest that he cannot choose to do without the good or buy a substitute for it. We are more likely to be mindful of the fact that almost all goods have substitutes if we speak of wants rather than needs. LO: 2 AACSB: Analytical Skills Bloom’s: Analysis 2. Even though we cannot actually measure utility directly, we can use the concept of utility to develop a model of how people behave (the marginal utility model) that helps us gain a better understanding of how a rational consumer would allocate her income among different goods. LO: 2 AACSB: Analytical Skills Bloom’s: Analysis 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 if we continue to spend income on a single good, our marginal utility will fall and our total utility will grow at a slower and slower rate. However, if we buy many different goods, each of which gives us a high amount of marginal utility, our total utility will be higher than if we concentrate our income on only one or a few goods. LO: 3 AACSB: Analytical Skills Bloom’s: Analysis 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 ice cream example or incur some other cost to gain access to it. LO: 3 AACSB: Analytical Skills Bloom’s: Analysis 5. Many people report that they didn’t like spicy food the first time they ate it, or didn’t like a certain band the first time they heard it. But on repeated exposure, they often find that they like these experiences more and more. LO: 3 AACSB: Analytical Skills Bloom’s: Analysis
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Answers to Problems 1. We would expect patrons of the gourmet restaurant to have higher incomes, on average, than patrons of the diner because willingness to pay for food quality is likely to be an increasing function of income. Since willingness to pay for service is also likely to be an increasing function of income, we expect better service in the gourmet
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This note was uploaded on 02/28/2012 for the course ECO 211 taught by Professor Arafat during the Summer '08 term at Anne Arundel CC.

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Ch005_plus_App_4e - Answers to Text Questions and Problems...

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