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Chapter 7 Consumer Behavior Utility is the benefit or satisfaction that a person receives from continuing a good or a service.The law of diminishing marginal utility indicates that gains in satisfaction become smaller as successive unit of a specific product are consumed.Diminishing marginal utility provides a simple rational for the law of demand.The theory of consumer behavior assumes that, with limited income and a set of product prices, consumer make rational choices on the bases of well-defined preferences.A consumer maximizes utility by allocation income so that the marginal utility per dollar spent is the same for everyone.A downward-sloping demand curve can be derived by changing the price of one product in the consumer-behavior model and noting the change in utility-maximization quantity of that product demanded.By providing insights on the income effect and substitution effect of a price decline, the utility-maximization modal helps explain why demand curves are down-sloping.MCQ’s on “Consumer Behavior”The utility of a particular good:is the same for everyone, even if its usefulness differs from person to personis a measure of the product's usefulnessincreases at a constant rateincreases at a decreasing rate2778826144531800Answer the next question on the basis of the following two schedules, which show the amounts of additional satisfaction (marginal utility) that a consumer derives from successive quantities of products J and K. Refer to the table. If this consumer has an income of $26 and the prices of J and K are $2 and $4 respectively, the consumer will maximize her utility by purchasing: 7 units of J and 3 units of K5 units of J and 4 units of K3 units of J and 5 units of K1 units of J and 6 units of K Jim enjoys having either a peanut butter sandwich or a bologna sandwich for his lunch. A drop in the price of peanut butter increases the marginal utility per dollar of peanut butter and causes Jim to buy more peanut butter and less bologna to restore maximum utility. This best illustrates the:Law of diminishing marginal utilityIncome effectSubstitution effectLaw of increasing total utilitySuppose the prices of products X and Y are $5 and $10, respectively. For a specific consumer who is currently exhausting her total income, the total utility from X is 100, while the total utility from Y is 200. The marginal utility of X and Y are both equal to 8. From this information, we can conclude:She is maximizing total utilityShe should purchase relatively more xShe should purchase relatively more yNothing about whether she is maximizing total utility Suppose the price of an iced coffee is $4 and the price of a candy bar is $2. In order to maximize total utility, a consumer who buys some of each should allocate purchases such that:The marginal utility of each good is the sameThe marginal utility of an iced coffee is half that of a candy barThe marginal utility of an iced coffee is twice that of a candy barThe total utility of an iced coffee is half that of a candy bar Kevin received 80 total units of utility from the first four chips he consumed. If the marginal utilities of the first, second, and third chips are 20, 25, and 20, respectively, the marginal utility of the fourth chip is:5 units of utility20 units of utility15 units of utilityUnknown, since Kevin's utility does not conform to the usual rules Jacque and Sharif have identical preferences but Sharif has a lower opportunity cost of time. We should expect that, compared to Jacque, Sharif: Will have a higher marginal utility of incomeWill have a higher total utility of incomeWill consume fewer time-intensive commoditiesWill consume more time-intensive commodities Joan occasionally enjoys wine with her meals. However, the more wine she consumes per month, the lower her marginal utility of wine. We can conclude that:Joan's demand for wine is inelasticJoan's demand for wine is downward slopingAn decrease in the price of wine will decrease Joan's total utilityA decrease in the price of wine will increase Joan's marginal utility The price of apples decreases and Josh responds by buying more apples and fewer oranges. Accordingly, the:Marginal utility of both apples and oranges will decreaseMarginal utility of both apples and oranges will increaseMarginal utility of apples will increase and the marginal utility of oranges will decreaseMarginal utility of apples will decrease and the marginal utility of oranges will increase Which of the following is consistent with maximum utility:The marginal utility of each product is the sameThe total utility of each product is the sameThe marginal utility of each product is zeroThe marginal utility per dollar of each product is the same Problems on Consumer BehaviorProblem 1:Suppose Maria's preferences for eggs and milk can be described by the following marginal utility schedules. Both eggs and milk cost $4; Maria has allocated $16 to the purchase of these two products.Unit of ProductsEggMilkMarginal UtilityMarginal UtilityFirst2436Second2030Third1624Fourth1218Fifth812Sixth46How should Maria allocate her $16 between eggs and milk so as to achieve maximum utility? Verify that the marginal utility per dollar of each good is the same at the utility maximizing bundle. Suppose the price of eggs falls to $2. By comparing the marginal utility per dollar of her current purchases of eggs and milk, should Maria purchase more eggs, more milk, or does her current bundle still maximize her utility?Assuming Maria still allocates $16 between the two goods, what amounts of eggs and milk maximize her utility at these new prices?From the exercises above, list two price/quantity combinations that lie on Maria's demand curve for eggs.Answer:At the given prices, find the marginal utility per dollar for each good by dividing marginal utility by price. This results in the table below.Unit of ProductsEggMilkMU Per DollarMarginal UtilityMU Per DollarMarginal UtilityFirst624936Second5207.530Third416624Fourth3124.518Fifth28312Sixth141.56The first unit of milk yields the biggest increase in utility per dollar, and uses $4 from the budget. The second unit of milk is still better than the first unit of eggs, and uses another $4. Either the first unit of eggs or the third unit of milk yields the same increase in utility per dollar. With $8 left in the budget, purchase one of each. Three units of milk and one unit of eggs maximize Maria's utility.The marginal utility per dollar on the first unit of eggs is 6 utils, the same as the marginal utility per dollar of the third unit of milk.At her current levels of consumption, the marginal utility per dollar of eggs rises to $12,Unit of ProductsEggMilkMU Per DollarMarginal UtilityMU Per DollarMarginal UtilityFirst1224936Second10207.530Third816624Fourth6124.518Fifth48312Sixth241.56In excess of her marginal utility per dollar of milk, this remains at $6. She should purchase relatively more eggs.Her current purchases now use only $14. She could use the extra two dollars to purchase the second unit of eggs, since its marginal utility per dollar (10) is now higher than the marginal utility per dollar of milk (still 6). Further, if Maria cuts back her purchases of milk to two units, she sacrifices 24 utils of satisfaction but frees up $4. She could use this $4 to purchase the third and fourth units of eggs, gaining 16 utils of satisfaction on the third and 12 utils of satisfaction on the fourth, for a net gain of 4 utils of satisfaction on the switch. Her new consumption bundle is then 4 units of eggs and 2 units of milk.When the price of eggs is $4, Maria demands 1 unit; at a price of $2, Maria demands 4 units.Questions on Consumer BehaviorQuestion 1:Complete the following table and answer the questions below:At which rate is total utility increasing: a constant rate, a decreasing rate, or an increasing rate? How do you know?"A rational consumer will purchase only 1 unit of the product represented by these data since that amount maximizes marginal utility." Do you agree? Explain why or why not."It is possible that a rational consumer will not purchase any units of the product represented by these data." Do you agree? Explain why or why not.Answer:Units consumedTotal utilityMarginal utility00-1101021883257430553336341A decreasing rate; because marginal utility is declining.Disagree. The marginal utility of a unit beyond the first may be sufficiently great (relative to product price) to make it a worthwhile purchase. Consumers are interested in maximizing total utility, not marginal utility.Agree. This product’s price could be so high relative to the first unit’s marginal utility that the consumer would buy none of itQuestion 2:Columns 1 through 4 in the table show the marginal utility, measured in utils, that Ricardo would get by purchasing various amounts of products A, B, C, and D. Column 5 shows the marginal utility Ricardo gets from saving. Assume that the prices of “A, B, C, and D” are $18, $6, $4, and $24, respectively, and that Ricardo has an income of $106.What quantities of A, B, C, and D will Ricardo purchase in maximizing his utility?How many dollars will Ricardo choose to save?Check your Answer by substituting them into the algebraic statement of the utility-maximizing rule.Answer:Answers are following:ProductQuantityFormulaA4MUAPA36$18=2B3MUBPB12$6=2C3MUCPC8$4=2D0MUDPDAt Product A = 72 (18x4), At Product B = 18 (6x3), At Product C = 12 (4x3), At Product D = 0 (0x0) So, saving is $4.MUAPA= MUBPB= MUCPC= MUDPD36$18= 12$6= 8$4=2$1The marginal utility per dollar of the last unit of each product purchased is 2.Question 3:You are choosing between two goods, X and Y, and your marginal utility from each is as shown in the table below. If your income is $9 and the prices of X and Y is $2 and $1, respectively: What quantities of each will you purchase to maximize utility? What total utility will you realize? Assume that, other things remaining unchanged, the price of X falls to $1. What quantities of X and Y will you now purchase? Using the two prices and quantities for X, derive a demand schedule (price-quantity-demanded table) for X.Answer:Buy 2 units of X and 5 units of Y. Marginal utility of last dollar spent will be equal at 4: MUxPx= MUyPy8$2= 4$1And the $9 income will be spent.Total utility = 48. (18 for X + 30 for Y)Units of XT.UtilityMUXUnits of YT.UtilityMUy110101882188215732463216428442655313530463326333When the price of X falls to $1, the quantity of X demanded increases from 2 to 4 (income effect).MUxPx= MUyPy4$1= 4$1 Total utility is now 58 (28 for X + 30 for Y)Units of XT.UtilityMUXUnits of YT.UtilityMUy110101882188215732463216428442655313530463326333Demand schedule for X: P = $2; Q = 2. P = $1; Q = 4. ................
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