Consumer Choice and Opportunity Cost in Utility Maximizing Rule

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Questions and Answers

What does the optimal purchase rule suggest?

Buy goods when marginal utility equals price. (correct)

Only buy goods when marginal utility is greater than price.

Buy goods at any price regardless of marginal utility.

Only buy goods when marginal utility is less than price.

How does the law of diminishing marginal utility impact demand curves?

It causes demand curves to slope upwards.

It results in demand curves with a negative slope. (correct)

It leads to perfectly elastic demand curves.

It creates erratic movements in demand curves.

What is the relationship between price and quantity demanded according to marginal utility theory?

As price increases, quantity demanded decreases. (correct)

As price increases, quantity demanded increases.

As price decreases, quantity demanded increases.

As price decreases, quantity demanded decreases.

How does the theory of consumer behavior assume consumers behave?

With a goal to maximize total utility. Signup and view all the answers

What influences a consumer's decision to buy additional units of a good according to the text?

Decrease in price. Signup and view all the answers

How does the law of diminishing marginal utility impact consumer willingness to purchase more units of a good?

Discourages consumers from buying more as price decreases. Signup and view all the answers

What is the opportunity cost of spending an extra dollar on good X?

The utility from good Y the purchaser could have gotten by spending that dollar on good Y Signup and view all the answers

According to the utility maximizing rule, how should the consumer allocate their money income?

So that each product yields the same amount of marginal utility Signup and view all the answers

If Product A costs $1 and has a marginal utility of 10, and Product B costs $2 with a marginal utility of 24, what is the marginal utility per dollar for Product A?

$12 Signup and view all the answers

In the scenario where Product A has a price of $1 and Product B has a price of $2, what product should the consumer purchase based on maximizing utility?

Product B Signup and view all the answers

If a consumer has $10 to spend, and Product A has a marginal utility of 8 and Product B has a marginal utility of 20, how should the consumer allocate their income to maximize utility?

$8 on Product A and $2 on Product B Signup and view all the answers

After purchasing 4 units of Product A with decreasing marginal utilities ($10, $8, $7, $6), what should the consumer consider doing next to maximize utility?

Switching to purchasing Product B due to higher marginal utility Signup and view all the answers

What is the marginal utility per dollar for the third unit of Product A?

9 utils Signup and view all the answers

When the last dollar was spent on each good, what was the utility obtained per dollar spent?

6 Signup and view all the answers

According to the utility maximizing rule, what should be the ratio of the marginal utility of Product A to the price of Product A?

$8 utils Signup and view all the answers

What is the marginal utility for the sixth unit of Product B?

4 utils Signup and view all the answers

In consumer decision making, why is it important to consider the marginal utility per dollar?

To maximize total utility within budget constraints. Signup and view all the answers

How does the demand curve relate to the concept of utility maximization?

It reflects how consumers maximize their utility given prices. Signup and view all the answers

Study Notes

Optimal Purchase Rule

Suggests consumers allocate their budget to maximize total utility through optimal consumption of goods.
Implies purchasing additional units until the marginal utility equals the price paid.

Law of Diminishing Marginal Utility

States that as a consumer consumes more units of a good, the additional satisfaction (utility) gained from each extra unit decreases.
Influences demand curves by indicating that higher prices reduce the quantity demanded due to lower marginal utility.

Price and Quantity Demanded

According to marginal utility theory, as the price of a good decreases, the quantity demanded increases due to higher marginal utility per dollar spent.

Consumer Behavior Assumptions

Assumes consumers act rationally to maximize utility based on income and price constraints.
Consumers weigh the additional satisfaction from purchasing goods against their costs.

Influencers for Additional Purchases

Decisions to buy additional units are influenced by the marginal utility derived from those units compared to their price.

Impact of Diminishing Marginal Utility on Purchases

As marginal utility diminishes, consumers will be less willing to buy additional units at higher prices, affecting overall demand.

Opportunity Cost of Extra Spending

The opportunity cost of spending an extra dollar on good X is the utility lost from not spending that dollar on the next best alternative good.

Utility Maximizing Rule

Consumers should allocate income such that the ratio of marginal utility to price is equal across all goods to achieve maximum satisfaction.

Marginal Utility Per Dollar Calculation

For Product A costing $1 with a marginal utility of 10, the marginal utility per dollar is 10.
For Product B costing $2 with a marginal utility of 24, the marginal utility per dollar is 12.

Purchasing Decision Based on Utility Maximization

In a scenario with Product A at $1 and Product B at $2, the consumer should purchase Product B since it provides higher utility per dollar (12 vs. 10).

Allocating Income to Maximize Utility

With a budget of $10, the consumer should assess the marginal utilities of both products to achieve an optimal combination for maximum overall utility within the budget.

Decision After Purchasing Units

After buying 4 units of Product A with decreasing marginal utilities, the consumer should consider whether the utility of the next unit justifies its cost, ensuring continued utility maximization.

Marginal Utility Per Dollar (Third Unit)

The marginal utility for the third unit of Product A provides an essential measure for judging the utility per dollar spent for that specific unit.

Utility Per Dollar Spent

When the last dollar is spent on goods, the utility obtained should be equalized between products to ensure maximum overall satisfaction.

Ratio of Marginal Utility to Price

The utility maximizing rule states this ratio should be equalized across products, ensuring consumers maximize satisfaction according to their spending.

Marginal Utility for Product B

For the sixth unit of Product B, the specific marginal utility value would determine how the consumer evaluates the benefit of additional units.

Importance of Marginal Utility Per Dollar

Key in consumer decision-making as it helps assess which goods provide the most satisfaction relative to their cost, guiding purchasing behavior.

Demand Curve and Utility Maximization

Demand curves reflect consumer preferences, showcasing how utility maximization principles govern consumer choices and quantity demanded at each price level.

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Description

This quiz covers the concepts of consumer choice as a trade-off, opportunity cost, and the utility maximizing rule in the theory of consumer behavior. Explore how decisions to purchase something involve forgoing something else, and learn how to allocate money income to maximize utility.