Chapter 7 - Utility Approach

Question 1

What does utility express?

Answer 1

The degree of satisfaction that a household or consumer derives or expects to derive from a good or service.

Question 2

What is the purpose of consumer behavior ?

Answer 2

Maximization of utility

Question 3

What is Cardinal utility?

Answer 3

The idea that utility can be measured in some way.

Question 4

What is ordinal utility?

Answer 4

Involves the ranking of different bundles of consumer goods or services in order of preference.

Question 5

So what does the utility approach intend?

Answer 5

Analysis of consumer behavior based on the assumption that the consumer can assign values to the amount of satisfaction (utility) obtained from each successive unit of a consumer good or service.

Question 6

What is marginal utility?

Answer 6

The extra or additional utility a consumer derives from consuming one additional unit of a good or service.

Question 7

What is total utility?

Answer 7

The sum of all the marginal utilities for a particular consumer.

Question 8

What does the law of Diminishing Marginal Utility state?

Answer 8

The marginal utility of a good or service eventually declines as more of it is consumed during any given period.

Question 9

What is the Law of Diminishing Marginal Utility also known as?

Answer 9

Gossen’s first law formulated in 1854.

Question 10

What does disutility mean?

Answer 10

If identical (homogeneous) units of a good are consumed - 1 after the other - the marginal utility will decline until it reaches zero. Negative utility is called disutility.

Question 11

For how long does total utility increase?

Answer 11

As long as marginal utility is positive.

Question 12

Total utility reaches maximum when marginal utility is zero. What does that zero indicate?

Answer 12

The consumer is satiated. ie dik gevreet.

Question 13

The aim is for a consumer to reach the highest “attainable” level of total utility. What 2 possible factors can hinder a consumer from reaching this?

Answer 13

Income & prices

Question 14

What is assumed in marginal utility?

Answer 14

That a consumer is aware of their wants and of the utility they will derive from satisfying these wants.

Question 15

What 2 conditions have to be met for the consumer to be in equilibrium (Gossen’s 2nd Law)?

Answer 15

1) the combination of the goods purchased has to be affordable
2) the weighted marginal utilities of the different goods must be equal.

Question 16

What does “real income” mean?

Answer 16

Purchasing power

Question 17

What is the effects of a price change?

Answer 17

A substitution effect or an income effect.

Question 18

Name 2 possible exceptions to the Law of demand.

Answer 18

1) the Snob (or Veblen) effect - rich preferring expensive goods for their snob value.
2) Giffen paradox - when the poor buy more of a staple good (maize) even when the price increase because now less can be afforded (meat)

Question 19

What is the bandwagon effect?

Answer 19

Goods that consumers want because other consumers have it - fashionable items. Such a demand curve will tend to be more price elastic.

Question 20

What is utility?

Answer 20

Consumer satisfaction