1.3. The Consumer Maximization Problem

Question 1

A consumer that maximizes utility reaches his/her _ position when the allocation of his/her expenditure is such that the last birr spent on each commodity yields the same utility.

Answer 1

equilibrium

Question 2

A consumer that _ utility reaches his/her equilibrium position when the allocation of his/her expenditure is such that the last birr spent on each commodity yields the same utility.

Answer 2

maximizes

Question 3

Economists have developed the concept of consumer equilibrium based on the following assumptions.

Answer 3

• The consumer is rational. She/he aims at the maximization of her/his utility or satisfaction.
• Cardinal measurement of utility is possible.
• If utility is measured in terms of money, the marginal utility of money remains constant.
• The law of diminishing marginal utility operates.
  -The Consumer income is given and remains constant
• Commodity prices given and remain constant.

Question 4

Let’s assume that the consumer consumes a single commodity, X. The consumer can either _ X or _ his money income Y.

Answer 4

buy, retain

Question 5

In the case of one commodity the consumer is in equilibrium when the marginal utility of X is _ to its market price (Px).

Answer 5

equated

Question 6

If MUx_Px, the consumer can increase his/her welfare by purchasing more units of X

Answer 6

>

Question 7

If MUx_Px, welfare can be increased by reducing the consumption of X.

Answer 7

<

Question 8

At Qx (quantity of product x) the marginal utility is MUx which is equal to Px. Hence, at Px consumer demands Q*x and this forms the _ for commodity X.

Answer 8

demand curve

Question 9

_ is simply the graphical representation of the relationship between price and quantity demanded.

Answer 9

The demand curve

Question 10

Thus, the expenditure on a single commodity X is: _
of the consumer, which is called _.

Answer 10

PX QX =Income (budget), consumers’ budget equation

Question 11

In the case where there are more commodities, the condition for the optimality of the consumer is the equality of the ratios of _ of the individual commodities to their prices

Answer 11

MU

Question 12

In the case where there are more commodities, the condition for the optimality of the consumer is the equality of the ratios of MU of the individual commodities to their _.

Answer 12

prices

Question 13

In the condition for the optimality, the utility derived from spending an additional unit of money must be _ for all commodities.

Answer 13

the same

Question 14

If the consumer derives greater utility from any one commodity, he/she can increase his/her satisfaction by spending _ on that commodity and _ on the others.

Answer 14

more, less

Question 15

Thus, the consumer will be at equilibrium when he/she consumes 2 quantities of bread at a price where the marginal utility of bread is _ the Price of bread.

Answer 15

equal to