Question 1

Suppose a consumer is at an optimum, consuming 6 hamburgers a week at a price of $1.50 each and 10 donuts a week at 50 cents a donut. If the price of a hamburger increases to $2.00, what will the consumer do to arrive at a new equilibrium? Why?

Accepted Answer

The answer of Suppose a consumer is at an optimum,...

Question 2

If you could pay for a product according to the marginal utility that you gain from additional consumption, then as you consume more of a product the price you pay would

Accepted Answer

If you could pay for a product according to the marginal utility that you gain from additional consumption, then the price you pay would decline as you consume more of the product. Marginal utility is the additional satisfaction that a consumer gains from consuming one more unit of a good or service. As a consumer consumes more of a good, the marginal utility that he/she gains decreases. Therefore, if the price is based on marginal utility, it would make sense for the price to decrease as the consumer consumes more of the product. This would encourage the consumer to consume more of the product, which would lead to greater overall satisfaction.

Question 3

Why does a price increase of a product result in a decrease in the quantity demanded of that product, according to utility analysis?

Accepted Answer

The answer of Why does a price increase of a...

Question 4

Discuss the substitution and real-income effects of a price decrease.

Accepted Answer

The answer of Discuss the substitution and real-income effects of...

Question 5

An individual's demand curve slopes down because

Accepted Answer

The law of diminishing marginal utility states that as individuals consume additional units of a good, the marginal utility (additional satisfaction) obtained from each additional unit decreases. This implies that individuals are willing to pay a higher price for the first units of a good because they yield a higher level of satisfaction, while they are willing to pay less for additional units that provide a lower incremental satisfaction. The rule of equal marginal utilities per dollar implies that consumers allocate their budget in a way that maximizes their satisfaction, meaning that they will spend more on goods with a higher marginal utility per dollar and less on goods with a lower marginal utility per dollar. As a result, consumers will demand more units of a good as its price decreases, but at a decreasing rate, leading to a downward sloping demand curve.

Question 6

The reason that diamonds cost more than water is

Accepted Answer

The primary reason diamonds cost more than water, despite water being essential for life, is related to the concept of marginal utility. The marginal utility of each additional diamond is quite high because diamonds are rare and most consumers only purchase a small number of them. This high marginal utility, combined with their scarcity, drives up the price of diamonds. In contrast, water is much more abundant and its marginal utility decreases significantly as consumption increases, leading to a lower price despite its necessity for life.

Question 7

-Refer to the above table. The price of a hamburger is $2, the price of a movie is $10, and the consumer has $44. What is the change in quantity demanded of hamburgers if the price of a hamburger decreases to $1?

Accepted Answer

The answer of 
-Refer to the above table. The price...

Question 8

A consumer was at an optimum. She then discovers that the marginal utility per dollar spent on food is more than the marginal utility per dollar spent on movies. She knows then that

Accepted Answer

To maximize utility, a consumer should allocate spending so that the marginal utility per dollar spent is equal across all goods. If the marginal utility per dollar spent on food is more than that on movies, it suggests a change in relative prices or consumption that has disturbed this balance. This could happen if the price of movies increased (making each dollar spent there less valuable in terms of utility) or if the price of food decreased (increasing the utility per dollar spent on food).

Question 9

The total utility of water is

Accepted Answer

Water has a higher total utility as it is a necessity for survival and is used for various purposes such as drinking, cooking, cleaning, etc. Diamonds, on the other hand, have a lower total utility as they are not necessary for survival and have limited uses. However, the marginal utility of diamonds is higher as people are willing to pay more for each additional diamond they acquire, whereas the marginal utility of water decreases as people acquire more of it. Therefore, choice C is the best answer.

Question 10

Which of the following statements is FALSE, with respect to what economist Adam Smith called the diamond-water paradox?

Accepted Answer

The diamond-water paradox highlights that even though water is more essential and has a higher total utility than diamonds, diamonds are priced higher due to their scarcity and the higher marginal utility of the last unit consumed. The demand for water is actually much larger than the demand for diamonds, not smaller, due to its essential nature for life.

Question 11

The diamond-water paradox was solved by knowing that

Accepted Answer

The diamond-water paradox was solved by understanding that the price of goods is determined by their marginal utility rather than their total utility. This explains why diamonds, which have a high marginal utility due to their rarity, are priced higher than water, which has a lower marginal utility due to its abundance, despite water having a higher total utility for survival.

Question 12

Why is water much cheaper than diamonds even though water is essential to human lives while diamonds are NOT?

Accepted Answer

The answer of Why is water much cheaper than diamonds...

Question 13

The diamond-water paradox illustrates the idea that ________ determines what consumers are willing to pay for a particular good.

Accepted Answer

The diamond-water paradox states that even though diamonds have a much lower total utility than water (as water is essential for survival), diamonds have a higher market value due to their higher marginal utility. This means that consumers are willing to pay more for diamonds because the marginal utility per unit is higher compared to water. Therefore, marginal utility determines what consumers are willing to pay for a particular good.

Question 14

-Refer to the above table. Suppose the price of a movie is $5 and the income of the consumer is $29. What are the quantities demanded of hamburger at prices of $2 and $1 respectively?

Accepted Answer

Given a consumer's income of $29 and the price of a movie being $5, the consumer can spend the remaining $24 on hamburgers after buying one movie ticket. At a hamburger price of $2, the consumer can buy 12 hamburgers ($24/$2), and at a price of $1, the consumer can buy 24 hamburgers ($24/$1). However, without the table mentioned, the correct quantities demanded cannot be directly inferred. The choice provided as correct (B) is based on a typical assumption in consumer choice problems, but without the specific table data, the exact answer might vary. My response assumes a general understanding of budget constraints and consumer choice theory.

Question 15

To derive the law of demand, we assume that

Accepted Answer

The law of demand states that as price increases, quantity demanded decreases, assuming all other factors remain constant. Therefore, to derive this law, we must assume that tastes (or consumers' preferences) remain constant. If tastes were to change, then the relationship between price and quantity demanded would also change, making it difficult to derive a consistent law of demand.

Question 16

Given the price of a good or service, what determines how much a person is willing to pay for that good or service?

Accepted Answer

The concept of marginal utility suggests that a person is willing to pay for a good or service based on the additional satisfaction or benefit that they gain from each additional unit consumed. As the quantity consumed increases, the marginal utility decreases, so the person's willingness to pay also decreases. Therefore, the price of a good or service should reflect the marginal utility of the last unit consumed, in order to maximize total revenue.

Question 17

The diamond-water paradox is an example that shows that

Accepted Answer

The diamond-water paradox shows that although water is essential for life and diamonds are not, diamonds have a higher market value because the marginal utility of an additional diamond is higher than the marginal utility of an additional unit of water. This demonstrates the importance of marginal utility in determining prices, rather than total utility or necessity.

Question 18

Why are diamonds more expensive than water?

Accepted Answer

The reason diamonds are more expensive than water is that the last diamond has a higher marginal utility than the last glass of water. Marginal utility refers to the additional satisfaction or usefulness gained from consuming one more unit of a good or service. While water is a necessity for survival and has a higher total utility, the demand for diamonds is driven by their rarity, aesthetics, and cultural significance, which makes them valuable and expensive.

Question 19

-Refer to the above figure. All of the following are true concerning the diamond-water paradox EXCEPT

Accepted Answer

The diamond-water paradox illustrates that the price of goods is not determined by their total utility but by their marginal utility. Diamonds have a high price because their marginal utility is high (due to their rarity), not because their overall demand is great. Demand for water is actually greater than for diamonds, but water's price is lower due to its abundant supply and lower marginal utility.

Question 20

The average demand curve slopes downward due to all of the following EXCEPT

Accepted Answer

The average demand curve does not slope downward due to the law of increasing relative costs. This law explains that as the price of a good increases, consumers may choose to substitute it with a cheaper alternative, but it does not directly affect the slope of the demand curve. The downward slope of the demand curve is primarily due to the laws of diminishing marginal utility, real-income effect, and principle of substitution.

Quiz 20: Consumer Choice