Measurement of Utility
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Questions and Answers

What determines the amount of goods released from stocks by producers?

  • Government subsidies
  • Consumer preferences
  • Change in production technology
  • Expectation of future price changes (correct)

    • Why is supply more elastic in the long-run?

  • Because of a decrease in production costs
  • Because of a change in consumer preferences
  • Because of an increase in the number of sellers
  • Because producers can produce substitutes (correct)

    • What is the effect of an increase in the price of coffee on the demand for tea?

  • The demand for tea decreases
  • The demand for tea increases (correct)
  • There is no effect on the demand for tea
  • The demand for tea becomes inelastic

    • What happens to the demand for complementary goods when the price of the commodity falls?

    <p>The demand increases</p> Signup and view all the answers

    What determines the elasticity of supply?

    <p>Production period</p> Signup and view all the answers

    In which market structure is supply more elastic?

    <p>Perfect competition</p> Signup and view all the answers

    What is the effect of an increase in the number of sellers on the elasticity of supply?

    <p>The elasticity of supply increases</p> Signup and view all the answers

    What is demand?

    <p>The amount of a commodity purchased at a particular price</p> Signup and view all the answers

    What is the characteristic of a commodity with a negative income elasticity of demand?

    <p>It is a luxury</p> Signup and view all the answers

    What does a cross elasticity of demand of 0 between two goods indicate?

    <p>The two goods are unrelated</p> Signup and view all the answers

    What does the law of supply state?

    <p>As price increases, quantity supplied increases</p> Signup and view all the answers

    What is the difference between movement along the demand curve and shift of the demand curve?

    <p>Movement is a response to price change, shift is a response to income change</p> Signup and view all the answers

    What is the equilibrium price in the market where the demand function is Q = 250 - 3P and the supply function is Q = 2P - 50?

    <p>25</p> Signup and view all the answers

    What is the study of the behavior of firms in the production of goods and services?

    <p>Theory of Production and Cost</p> Signup and view all the answers

    What is the term for the total cost of production divided by the quantity produced?

    <p>Average cost</p> Signup and view all the answers

    What is the concept that describes the relationship between a firm's production process and its total cost?

    <p>Theory of Production and Cost</p> Signup and view all the answers

    What is the total utility of consuming 6 quantities of banana?

    <p>22 utils</p> Signup and view all the answers

    What happens to the marginal utility of a commodity when its consumption increases beyond the saturation point?

    <p>It becomes negative</p> Signup and view all the answers

    What is the law of diminishing marginal utility?

    <p>The utility of a commodity decreases with every additional unit</p> Signup and view all the answers

    What is the marginal utility of consuming 2 quantities of commodity Y?

    <p>6 utils</p> Signup and view all the answers

    What is the total utility of consuming 0 quantities of commodity Y?

    <p>0 utils</p> Signup and view all the answers

    What is the main assumption of the cardinal utility theory?

    <p>Utility is measurable</p> Signup and view all the answers

    What happens to the total utility when consumption increases beyond the saturation point?

    <p>It decreases</p> Signup and view all the answers

    What does the law of diminishing marginal utility state?

    <p>The utility of a commodity decreases with every additional unit, provided the consumption of all other goods remains constant</p> Signup and view all the answers

    What is the total utility that a consumer gets from consuming a certain quantity of a commodity?

    <p>The total amount of satisfaction a consumer gets from consuming or possessing some specific quantities of a commodity</p> Signup and view all the answers

    What is the saturation point for a commodity?

    <p>The point where the consumer stops deriving any greater satisfaction from the commodity</p> Signup and view all the answers

    What is the mathematical formula for marginal utility?

    <p>MU = ∆TU / ∆Q</p> Signup and view all the answers

    What is the unit of measurement for marginal utility?

    <p>Utils</p> Signup and view all the answers

    What happens to the total utility of a consumer as they consume more of a good?

    <p>It increases, but only up to a certain point</p> Signup and view all the answers

    What is the marginal utility of the 3rd orange in the example given?

    <p>2 utils</p> Signup and view all the answers

    What does the concept of marginal utility help to explain?

    <p>How consumers make decisions about how much of a good to consume</p> Signup and view all the answers

    What is the relationship between total utility and marginal utility?

    <p>Marginal utility is the difference between total utilities</p> Signup and view all the answers

    What is the main characteristic of the money market?

    <p>Financial instruments with a maturity date of one year or less</p> Signup and view all the answers

    What is the return on investment for Treasury Bills?

    <p>Buying at a lower price and receiving the maturity value at maturity</p> Signup and view all the answers

    What is the original maturity of Commercial Papers?

    <p>One day to 270 days</p> Signup and view all the answers

    What is true about Certificates of Deposit (CDs)?

    <p>They are issued by large commercial banks with original maturities between one month and one year</p> Signup and view all the answers

    What is the main characteristic of the Capital Market?

    <p>Financial instruments with a maturity date of more than one year</p> Signup and view all the answers

    What is an example of a Debt Obligation in the Capital Market?

    <p>Treasury Bills</p> Signup and view all the answers

    What is the type of Capital Market security that includes common stock and preferred stock?

    <p>Equity</p> Signup and view all the answers

    Which of the following is not a money market instrument?

    <p>Common Stock</p> Signup and view all the answers

    Study Notes

    Measurement of Utility

    • Total Utility (TU) refers to the total amount of satisfaction a consumer gets from consuming a specific quantity of a commodity at a particular time.
    • TU increases as the consumer consumes more of a good, but there is a saturation point beyond which the consumer will not be capable of enjoying any greater satisfaction.
    • Marginal Utility (MU) refers to the additional utility obtained from consuming an additional unit of a commodity.
    • MU is the change in total utility resulting from the consumption of one more unit of a product per unit of time.
    • Mathematically, the formula for marginal utility is: MU = ΔTU / ΔQ, where ΔTU is the change in total utility, and ΔQ is the change in the amount of product consumed.

    Activity 1.2

    • Find the missed value of total utility (TU) and marginal utility (MU) in the table.
    • Table 1.1 shows numerical values of marginal and total utility derived from the consumption of a hypothetical commodity (X).

    Activity 1.3

    • Given a table showing TU of consuming commodity Y, find marginal utility (MUY) and draw total utility (TUY) and marginal utility (MUY) curves.
    • Marginal utility of a commodity is diminishing, meaning that the utility derived from consuming successive units of a commodity goes on decreasing.
    • The main assumptions of the cardinal utility theory are:

    The Law of Diminishing Marginal Utility (LDMU)

    • LDMU states that as the quantity consumed of a commodity increases over a unit of time, the utility derived by the consumer from the successive units goes on decreasing, provided the consumption of all other goods remains constant.
    • The law is central to the cardinal utility analysis of consumer behavior.
    • The utility that a consumer gets from consuming a commodity for the first time is not the same as the consumption of the good for the second, third, fourth, etc.

    Unit 2: Theories of Demand and Supply

    • The law of supply states that as the price of a commodity increases, the quantity supplied of the commodity also increases, ceteris paribus.
    • Factors that determine elasticity are:
      • Production period: The amount of time available to producers for responding to changes in product price.
      • Factor substitution: If there are greater substitutes for factors of production, supply is more elastic.
      • Number of sellers: The market’s supply will be more elastic when there are large numbers of firms serving the market.
    • Elasticity is a measure of how responsive the quantity supplied or demanded is to changes in its determinants.

    Unit 3: Theories of Production and Cost

    • The unit explores the theory of production and cost, which emphasizes the behavior of firms in the production of goods and services.
    • Firms incur costs when they buy inputs to produce the goods and services that they plan to sell.
    • The unit objectives include:
      • State production and production functions in the short and long run.
      • Derive and draw the various average and marginal functions from the total functions.
      • Calculate the average and marginal cost and productivity values.
      • Draw and explain the relationship between different types of cost curves.
      • Show the relationship between production and cost curves.
      • Discuss the stages of production.
      • Analyze the concept of returns to scale in production.

    Unit 5: Banking and Finance

    • The money market is the sector of the financial market that includes financial instruments with a maturity date of one year or less at the time of issuance.
    • Money market instruments include:
      • Treasury bills
      • Commercial papers
      • Negotiable certificates of deposit
      • Repurchase agreements
      • Bankers’ acceptances
    • The capital market is the sector of the financial market where long-term financial instruments are issued by corporations and governments.
    • Capital market securities include:
      • Equity (common stock and preferred stock)
      • Debt Obligations

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    Description

    Understand the concept of total utility and how it increases as a consumer consumes more of a good, until a saturation point is reached. Learn about the measurement of utility in microeconomics.

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