RELATED CONCEPTS:|CONSUMER SURPLUS |GIFFEN PARADOX |INCOME EFFECT |LAW OF DIMINISHING MARGINAL UTILITY |LAW OF EQUAL MARGINAL UTILITY |PER DOLLAR |MARGINAL UTILITY |SUBSTITUTION EFFECT |TOTAL UTILITY |.
Why do we add consumers’ demand curves together horizontally to get the market demand curve?
- Because economists want to sum the amounts consumers will buy at each price.
How are total utility and marginal utility related?
- Marginal utility is the addition to total utility when one more unit of a good is consumed.
Does a good with a higher total utility also have a higher marginal utility?
- The total utility and marginal utility of differing goods need not be related. Water, for example, has a high total utility but a small marginal utility.
What happens to total utility as marginal utility diminishes (as one consumes more of a good)?
- As long as marginal utility is positive, when more of a good is consumed, total utility increases.
If the marginal utilities per dollar of two goods are not the same, why will consumers change their consumption pattern?
- Because consumers will be better off by consuming more of the good that has the higher marginal utility per dollar. By doing this, they will be gaining more utils per dollar than they are giving up.
What is the substitution effect of a price increase?
- The substitution effect is the decrease in the quantity demanded of a good that results when the good’s relative price goes up (holding the consumer’s real income constant).
What is the income effect of a price increase? How does it differ for normal and inferior goods?
- The income effect of a price increase is the change in the quantity demanded due to the decrease in real income caused by the price increase. For a normal good, the quantity demanded falls; for an inferior good, it rises.
Is the marginal utility of a candy bar greater to a poor person or a rich person?
- Since utility between persons cannot be objectively compared, it is impossible to say.
Bill has spent $300 for a video recorder. He would have been willing to pay $500. What is his consumer surplus?
- $200 ($500 - $300) is Bill’s consumer surplus.
Even if consumers could still consume the same goods they have been consuming, why will a change in relative prices cause them to change their consumption pattern?
- Those goods whose price fell will now have a higher marginal utility per dollar: Consumers will demand more of these goods.
Copyright 2008 by Sujanto Rusli
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