CHAPTER 5 Consumer Choice
Test Yourself
1. The total utility from 22 gallons is greater, since it is equal to the total utility (or usefulness) of the first 14 gallons, plus the total utility of the next 8.*
2. The marginal utility at 14 gallons is greater. You use the first 14 gallons for your highest priorities. The next gallons are used for purposes of decreasing importance. This is the “law” of diminishing marginal utility.
6. Figure 1 shows that Jim buys 3 boxes of berries, where marginal utility equals price. On the first box, his consumer’s surplus is the excess of MU (6) above P (2), or the dotted line AB. Similarly his surplus on the second box is CD (4 - 2), and the total consumer’s surplus is the sum of the two lines, 4 + 2, or 6.
Figure 1
7.
Figure 2
Discussion Questions
1. In descending order of importance, water is used for drinking, for cooking, for bathing, to feed pets, to wash clothes, to water lawns, to store in swimming pools, etc. (the students’ order may differ). As the price of water rose, you might give up some of these uses, beginning at the end of the list. Alternatively, you might retain all or most of these uses, but cut down on the amount for each.
2. You could ask the consumer to construct a scale, from 1 to 100, then reveal where on the scale each commodity falls. Or you could try measuring blood pressure or pulse as the consumer gets different commodities. But there is no guarantee that either procedure would be meaningful. The self-constructed scale might be biased and inconsistent; the consumer’s physiological response might have little to do with satisfaction. There are some obvious (and not so obvious) objections to using the amount of money a person is willing to give up as a measure of utility, but there does not seem to be a better solution.
3. It is reasonable to assume that rational consumers are trying to get the most possible consumer’s surplus for themselves, that is, the most total utility less expenditure—not the most possible average utility per good or marginal utility. If a consumer quit buying when the marginal utility was higher than the price, then he or she would be forgoing the opportunity to increase consumer’s surplus: By buying one more unit, the consumer could accumulate more utility than he or she would be giving up in terms of money forgone. This will continue to be true until so much is bought that the marginal utility of the next good has fallen to a level equal to the price.
CHAPTER 5 Apx
Test Yourself
1. Gas = Taco; Answer in text appendix is to a different question
Figure 3
2. Gas = Taco
Figure 4
(a) 25 gallons and 25 hot dogs.
(b) 37 gallons and 38 hot dogs. Neither are inferior goods
(c) 25 gallons and 25 hot dogs.
3. The slope of an indifference curve is the maximum number of units of the good on the Y-axis (say, cookies) the consumer is willing to give up to get one more unit of the good on the X-axis (say, compact discs). An indifference curve that is U-shaped with respect to the origin has a relatively large slope towards the upper left side and a relatively small slope towards the lower right. This indicates that a consumer who has many cookies but few compact discs is willing to give up a lot of cookies in order to get one more compact disc—but when the tables are turned, the consumer who has many compact discs and only a few cookies is willing to give up only a small number of cookies to get an additional compact disc. This is consistent with the idea of diminishing marginal utility in the case of one good considered alone.