If you buy something in the shop on the corner when

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. If you buy something in the shop on the corner when you know that the same item could have beenbought more cheaply two miles up the road in the supermarket, is your behaviour irrational?Explain.AnswerNot necessarily. If you could not have anticipated wanting the item and if it would cost you timeand effort and maybe money (e.g. petrol) to go to the supermarket, then your behaviour is rational.Your behaviour a few days previously wouldhave be irrational, however, if, when making out yourweekly shopping list for the supermarket, a moment’s thought could have saved you having to makethe subsequent trip to the shop on the corner.Are there any goods or services where consumers do not experience diminishing marginal utility?AnswerVirtually none, if the time period is short enough. If, however, we are referring to a long timeperiod, such as a year, then initially as more of an item is consumed people may start ‘getting moreof a taste for it’ and thus experience increasing marginal utility. But even with such items,eventually, as consumption increases, diminishing marginal utility will be experienced.If Darren were to consume more and more crisps would his total utility ever (a) fall to zero; (b) becomenegative? Explain.AnswerYes, both. If he went on eating more and more, eventually he would feel more dissatisfied than ifhe had never eaten any in the first place. He might actually be physically sick!
52Chapter 4Complete this table to the level of consumption at which TU is at a maximum.AnswerQ60Q–4Q2=TU160–4=562120–16=1043180–36=1444240–64=1765300–100=2006360–144=2167420–196=2248480–256=224
53Chapter 4Derive the MU function from the following TU function:TU= 200Q– 25Q² + Q³From this MU function, draw up a table (like the one above) up to the level of Q where MUbecomes negative. Graph these figures. AnswerMU= dTU/dQ= 200 – 50Q+ 3Q²Q200–50Q+3Q2=MU1200–50+3=1532200–100+12=1123200–150+27=774200–200+48=485200–250+75=256200–300+108=87200–350+147=–3If a good were free, why would total consumer surplus equal total utility? What would be the level ofmarginal utility?AnswerBecause there would be no expenditure. At the point of maximum consumer surplus, marginalutility would be equal to zero, since if P= 0, and MU= P, then MU= 0.Why do we get less consumer surplus from goods where our demand is relatively elastic?AnswerBecause we would not be prepared to pay such a high price for them. If price went up, we wouldmore readily switch to alternative products.-2002040608010012014016018001234567Diagram 4.1MU= 200 – 50Q+ 3Q2
54Chapter 4How would marginal utility and market demand be affected by a rise in the price of acomplementary good?AnswerMarginal utility and market demandwould fall (shift to the left). The rise in theprice of the complement would cause lessof it to be consumed. This wouldtherefore reduce the marginal utility ofthe other good. For example, if the priceof lettuce goes up and as a result weconsume less lettuce, the marginal utilityof mayonnaise will fall.

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