Chapter 3: Consumer Behavior and Utility Maximization

Question 1

Define utility

Answer 1

The want-satisfying power of a good or service; the satisfaction or pleasure a consumer obtains from the consumption of a good or service (or from the consumption of a collection of goods and services).

Question 2

Is utility and uselfulness the same? WHy or why not?

Answer 2

No.
The utility of a good or service is the
satisfaction or pleasure one gets from
consuming it., satisfaction is not the same as usefulness considering usefulness is definitive an dsatisfaction is subjective.

Question 3

What are the 2 methodologies when measuring utility?

Answer 3

Cardinal Utility
Ordinal utilityf

Question 4

Define cardinal utility

Answer 4

A form of utility measurement where utility is measurable in numerical values.

Question 5

Define oridnal utility

Answer 5

A form of utility measurement where consumers’ satisfaction is not quantifiable but the level of satisfaction is based on comparisons in consumptions expressed in indifference curves.

Question 6

Define total utiliy

Answer 6

The total amount of satisfaction derived from the consumption of a specific quantity of a good or a service.

Question 7

Give two definitions of marginal utility

Answer 7

• the extra satisfaction a consumer realizes from an additional unit of that product.
• is the change of total utility that results from the consumption of 1 more unit of a product.

Question 8

How to determine marginal utility?

Answer 8

MU=ΔTU/ΔG

Question 9

Define law of diminishing marginal utility

Answer 9

The principle that, as a consumer increases the consumption of a good or service, the marginal utility obtained from each additional unit of the good or service decreases.

Question 10

Define Weighted Marginal utility

Answer 10

the per-rand value extra satisfaction (weighted extra satisfaction) a consumer realizes from an additional unit of that product.

Question 11

How to calculate WMU?

Answer 11

WMU=MU/Price

Question 12

What dimensions can we assume the typical consumer has? Elaborate shortly on each.

Answer 12

• Rational behaviour: Consumers try to maximise their utility with the available income
• Preferences: Each consumer prefers different services and goods because they recieve different MU.
• Budget constraint: At any point in time the consumer has a fixed, limited amount of money income.
• Prices: Goods are scarce relative the demand so every good carries a price tag.

Question 13

How would a consumer compare products to determine utility maximising numerically?

Answer 13

• Compare Marginal Utilities
• Then compare per-rand value (MU/Price)
• Choose the highest
• Check budget , proceed to next item and repeat.

Question 14

Determine the best product to buy:
A: MU=10; Price= R1
B: MU: 24; Price: 12

Answer 14

Product B.

Question 15

Define utility-maximising rule

Answer 15

The principle that to obtain the greatest utility, the consumer should allocate money income so that the last rand spent on each good or service yields the same marginal utility.

Question 16

State the utility maximising rule algebraically.

Answer 16

MU of A/Prive of A= MU of B/Price of B

Question 17

When is the consumer in equilibrium?

Answer 17

At the point on the budget line that lies on the highest attainable indifference curve. At the point where the budget line is tangential to the indifference curve.

Question 18

Define MRS.

Answer 18

Marginal rate of substitution: The rate at which a consumer is willing to substitute one good for another (from a given combination of goods) and remain equally satisfied (have the sametotal utility); equal to the slope of a consumer’sindifference curveat each point on the curve.