Equi-Marginal Principle Quiz: Understanding Utility in Microeconomics

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Questions and Answers

What is the Equi-marginal principle?

Consumers maximize their utility when the marginal valuation for each product consumed is unclear

Consumers maximize their utility when the marginal valuation for each product consumed is different

Consumers maximize their utility where the prices of products consumed are different

Consumers maximize their utility where their marginal valuation for each product consumed is the same (correct)

What does the Law of diminishing marginal utility state?

As the quantity consumed of a product by an individual increases, marginal utility increases

As the quantity consumed of a product by an individual increases, marginal utility remains constant

As the quantity consumed of a product by an individual increases, marginal utility decreases (correct)

As the quantity consumed of a product by an individual increases, marginal utility fluctuates

What characterizes Indifference curves?

They are upward sloping curves

They can intersect with each other

They are straight lines

They are downward sloping curves (correct)

What is Marginal Utility?

The satisfaction gained from one more unit of a product consumed over a particular period of time Signup and view all the answers

When does the Law of diminishing marginal utility come into play?

When consumers consume more units of a product Signup and view all the answers

'Substitution/Income effect' refers to:

Change in quantity demanded due to change in relative price/real income Signup and view all the answers

What is the formula for total revenue (TR)?

Price x quantity Signup and view all the answers

In the LRAC envelope curve, what does a downward sloping curve indicate?

Increasing economies of scale Signup and view all the answers

What is the formula for average revenue (AR)?

Total revenue / output Signup and view all the answers

When TR is maximum, what is the value of Marginal Revenue (MR)?

0 Signup and view all the answers

What represents a situation of decreasing returns to scale?

Factor input increases at a proportionally faster rate than output Signup and view all the answers

Where do external economies of scale apply?

Cost saving accruals to all firms in an industry as the scale increases Signup and view all the answers

What concept is illustrated by the movement from point E1 to E2 on the indifference curve?

Substitution effect Signup and view all the answers

Which effect causes the shift from point E2 to E3 on the indifference curve?

Income effect Signup and view all the answers

What type of goods have a price and demand relationship that is directly related?

Giffen goods Signup and view all the answers

Which cost remains constant as output changes in the short run?

Average fixed cost Signup and view all the answers

What does the production function show?

Maximum possible output for given inputs Signup and view all the answers

Which concept represents the change in cost per additional unit of quantity produced?

Marginal cost Signup and view all the answers

Study Notes

Indifference Curves

Higher curves represent higher consumption levels
All curves are downward sloping
Indifference curves cannot cross
Indifference curves are convex to the origin

Utility

Utility is the satisfaction gained from consuming a product
Total utility is the satisfaction gained from consuming all units of a product over a particular period
Marginal utility is the satisfaction gained from one more unit of a product consumed
Consumers purchase products when price (P) is less than or equal to marginal utility (MU)
Law of diminishing marginal utility states that as quantity consumed increases, marginal utility decreases
Equi-marginal principle: consumers maximize utility when marginal valuation for each product is the same

The Price System & Microeconomy

Substitution/income effect: change in quantity demanded due to change in relative price/real income
Budget line shifts when there is a change in prices of one or both products with nominal income remaining the same

Revenue and Cost

Total revenue (TR) = price x quantity
Average revenue (AR) = total revenue / output
Costs in the long run:
- When TR is maximum, marginal revenue (MR) is 0
Average fixed cost = total fixed cost / output
Average variable cost = total variable cost / output
Average total cost = total cost / output
Marginal cost = change in cost / change in quantity

Economies and Diseconomies of Scale

Increasing returns to scale: output increases at a proportionately faster rate than the increase in factor outputs
Decreasing returns to scale: factor input increases at a proportionally faster rate than the increase in output
Economies of scale: benefits gained from falling long-run average costs as the scale of output increases
External economies of scale: cost savings accrue to all firms in an industry as the scale increases
Diseconomies of scale: long-run average cost increases as the scale of output increases
Types of economies of scale:
- Technical
- Transport
- Financial
- Concentration
- Managerial
- Knowledge
- Marketing
- Ancillary industries
- Purchasing
- Specialised labour
- Risk-bearing
- Reputation
Least cost combination: (MPP factor A) / (P factor A) = (MPP factor B) / (P factor B)

Change in Nominal Income

Substitution effect: change in quantity demanded due to change in relative price
Income effect: change in quantity demanded due to change in nominal income
Price effect = Substitution effect + Income effect

Giffen/Veblen Goods

Goods whose price and demand are directly related as they are necessary/luxurious
Examples of price change effects on different types of goods

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Description

Learn about Equi-marginal principle stating that utility is maximized when the ratio of the marginal utility to price is equal for all products. Understand utility as satisfaction from consumption, total utility and marginal utility in microeconomics.

Equi-marginal Principle and Utility in Microeconomics

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