chapter 5 utility theory

Question 1

utility definition

Answer 1

satisfactory/ pleasure derived from the consumption of a product
*consumers want to maximize total utility given some budget

Question 2

what do consumers want to do?

Answer 2

want to maximize their total utility, more total utility is better than less

Question 3

what is marginal utility

Answer 3

additional utility gained from consumption of another unit
*decreasing marginal utility for most goods for most rational consumers when they consume more
more you consume the less it benefits you; one donut is okay 7 will make u throw up
Thus more consumption is not always better

Question 4

how is utility meassured

Answer 4

util

Question 5

the value of marginal utility =

Answer 5

change in total utility divided by the change in quantity

Question 6

the value of total utility =

Answer 6

sum of all the marginal utilities, or

TU3=MU1+MU2+MU3
or
TU3=MU3+TU2

Question 7

maximum total utility is when marginal utility is equal to?

Answer 7

when marginal utility is at 0 total utility is at max

Question 8

mu < 0 means

Answer 8

total utility is falling

Question 9

what is the optimal purchasing rule

Answer 9

maximize total utility by purchasing in order of highest to lowest marginal utility per dollar spent, MU/$ or MU/price,

if MUx/Px > MUy/Py then you buy more of good x

you are getting more bang for your buck

Question 10

how to determine what stuff someone should buy

Answer 10

1. make / complete graph, determine mu/$ for each quantity at each mu. Do this for each product
2. make a purchase order, then pick each product that has the highest, mu/p values and if there are two products with the same mu/p value, then choose the one with the most utils(mu)
   then once you have spent all your money, add up your Marginal utils value and that’s the max

Question 11

Dollar marginal utility

Answer 11

because utility is actually pretty dumb, you can measure utility in dollars rather than utils,

• declining marginal utility still exists
• $MU is the demand curve now, someone is willing to spend 15 dollars on 1 unit, but they will buy 5 units if they are cheaper,

Question 12

what is dollar marginal utility saying

Answer 12

that you are willing to spend a certain amount of money on a product based on how much you value it, if you really love pomegranates you’re willing to spend 10$ on one

• it asks what’s the max price you’re willing to pay at this quantity
• its utility in terms of dollars VERY DIFFERENT FROM MU/$- that is to compare other products

Question 13

dollar marginal utility, how is it decreasing

Answer 13

you are willing to pay 10$ for one pomegranate, but 8$for the second, 6$ for the third, because they have decreasing marginal utility and so on and if the price is 11$ you won’t buy any- too expensive, if they price is 9$ you still only buy one because you can’t buy half a pomegranate

Question 14

what is a consumer surplus simple explanation

Answer 14

the difference between what a customer is willing to pay and the actual price of the product
-its not money its satisfaction for free

Question 15

how to calculate marginal consumer surplus

Answer 15

MCS=$MU-price

Question 16

what is total consumer surplus

Answer 16

it is the sum of all the marginal consumer surpluses derived from each successive unit consumed
TCS=SUMof all MCS at each unit

Question 17

how does a consumer surplus work? (explain the math/where you are getting the values)

Answer 17

-at 10$ im willing to buy one pomegranate, im willing to pay 8$ for the next one,5$ for the next one (3) so for 3 pomegranates im willing to spend a total of 23$ however, if they are charging 5$/ pomegranate, i can buy 3 pomegranates for 15$ (even though I was willing to pay 23, im not willing to spend more than 10$ for one but I will pay less for the next one and so on, but right now I would be in advantage, im saving money, this is the surplus)
so $MU-price= consumer surplus
MCS=10-5=for one pomegranate that is the marginal consumer surplus.
- total consumer surplus is the sum of MCS at each unit
TCS=10+8+5-15= 8

Question 18

how do you calculate Total consumer surplus when working with large quantities or divisible quantities

Answer 18

you calculate the area of the consumer surplus by using area of a rectangle basexheight/2

Question 19

how do you calculate total revenue

Answer 19

price x units sold

Question 20

how do you calculate total willingness to pay

Answer 20

you add total revenue with consumer surplus

Question 21

price discrimination

Answer 21

for the same product, charge different customers, different prices. - the goal is to increase revenues by charging consumers closer to their max willingness to pay to get rid of some of the surplus

Question 22

ways in which producers discriminate against price

Answer 22

• age, occupation, gender(student discount)
• time of purchase (happy hour)
• quantity purchased

Question 23

how does price discrimination work

Answer 23

charge higher prices for certain people, this decreases the consumer surplus because there’s a small portion of people willing to pay more-and then there’s another additional amount of people willing to pay the cheaper price

Question 24

how to calculate new revenue after price discrimination occurs

Answer 24

-old tr+ loss of consumer surplus= new revenue

Question 25

what does price discrimination recognize

Answer 25

consumers have different demands for the same product and are prepared to pay for different prices for the same product

Question 26

how do producers practice price discrimination

Answer 26

identify groups of consumers —-with different demand elasticities

• separate them from others
• ensure that those obtaining lower prices cannot resell the product
• ensure that the seller has control over the price