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 |.
For Bill, clothing has marginal utility of 20 utils and food has a marginal utility of 20 utils. If clothing costs $4 and food $8, is Bill doing the best he can? If not, what can he do to increase his utility?
- MU/P for clothing is 5, for food 2.5. Bill should buy more clothing and less food.
Suppose food costs $12 and clothing costs $2, and at the highest level of utility, clothing has a marginal utility of 6 utils. What is the marginal utility of food?
- From the equality of MU/P, MUf/$12 = 6 utils/$2. MUf = 36 utils
If you are taking a test that has several questions, how should you allocate your time among the questions in order to get the highest score?
- You should allocate your time so that the last minute spent on each question adds the same number of points to your total score.
Mary buys a Cadillac instead of a Chevrolet. The Cadillac costs exactly twice as much as the Chevrolet. What can we conclude about Mary’s marginal utility of owning a Cadillac relative to owning a Chevrolet?
- For Mary, the marginal utility of owning a Cadillac must be twice as high, or higher, as the marginal utility of owning a Chevrolet.
What is wrong with the following statement: “According to the law of diminishing marginal utility, if you consume less food, the marginal utility you receive from the last unit of food goes up. So you will have greater total utility from consuming less food.”
- As one less unit of food is consumed, total utility decreases by the unit’s marginal utility. As less food is consumed, the law of diminishing marginal utility states that this loss in total utility becomes bigger.
Bill is maximizing his utility. He is consuming (among other goods) beer, which costs $1 a can, and pretzels, which cost $50 a bag. Which good has the higher marginal utility? What is the ratio of his marginal utilities?
- The MU of a can of beer will be twice the MU of a bag of pretzels (the ratio of marginal utilities equaling the ratio of prices).
Suppose the government taxed food and either (1) gave the tax revenues back to Americans in the form of reduced income taxes or (2) gave the tax revenues to a foreign government. In which case (1) or (2) will the demand for food go down more? (Food is a normal good).
- In case (2), because the loss in real
Mary has $12 to spend. She buys two beers (which cost $3 each) and three bowls of chili (which cost $2 each). Then the price of beer falls to $2 and chili’s price goes up $3. How will Mary change her consumption of beer and chili? Does this event reflect a substitution effect, an income effect, or both?
- Mary will buy more beer and less chili. Since she could have bought her old quantities at the new prices, her real income has not changed. So this event reflects the substitution effect onl
Copyright 2008 by Sujanto Rusli
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