Consumer behaviour
&
Utility maximization
True or false :
1) The law of diminishing marginal utility states that marginal utility will always
decrease when a consumer uses more units of a good or service.
2) If total utility is increasing, marginal utility must be positive but decreasing.
3) Downward-sloping product demand curves can be explained by diminishing
marginal utility.
4) If PA = 5 and MU A = 10, while PB = 1 and MU B = 3, this consumer should
buy more of good B and less of good A.
5) As marginal utility declines, a lower price will be needed to induce the consumer
to buy more of a product.
6) The theory of consumer behavior assumes that there is a budget constraint.
7) The law of diminishing marginal utility states that the total utility a consumer
derives from a product will sometimes decrease as consumption of the product
increases.
Essay questions :
•
Describe the law of diminishing marginal utility. On what assumptions is this
law based?
•
Explain the utility maximizing rule for two products in words and using
algebra.
•
Can marginal utility be negative? Briefly explain with an example.
Multiple choice :
1) Which of the following defines marginal utility?
A)
the change in total utility divided by the price of a product
B)
the maximum amount of satisfaction from consuming a product
C)
the total satisfaction received from consuming as much of the
product that is available for consumption
D)
the additional satisfaction received from consuming one more
unit of a product
2) According to the law of diminishing marginal utility, the marginal utility
associated with consuming successive units of a good will:
A)
increase as the amount consumed decreases.
B)
remain constant as the amount consumed increases.
C)
eventually decline as the amount consumed increases.
D)
eventually increase as the amount consumed increases.
3) Based on utility theory, which statement is valid ?
A)
Marginal utility is positive when total utility is increasing.
B)
Marginal utility is positive when total utility is decreasing.
C)
Marginal utility is negative when total utility is increasing.
D)
Marginal utility is zero when total utility is decreasing .
4) Children who refuse to eat vegetables at dinner are making the statement
that the marginal utility of vegetables is:
A)
zero.
B)
negative.
C)
positive, but decreasing.
D)
less than the total utility.
5)
If total utility is increasing, then marginal utility:
A)
must be declining.
B)
must be increasing.
C)
must be increasing at an increasing rate.
D)
may either be increasing or decreasing, but it must be greater
than zero.
6) A consumer is in equilibrium and is spending income in such a way that
the marginal utility of product X is 40 units and Y is 16 units. The unit price of
X is k.d 5. The price of Y is:
A)
1 k.d per unit.
B)
2 k.d per unit .
C)
3 k.d per unit.
D)
4 k.d per unit .
Answer the next question(s) based on the table below showing the marginal
utility schedules for product X and product Y for a hypothetical consumer.
The price of product X is k.d 4 and the price of product Y is k.d 2. The
income of the consumer is k.d 20.
Product X
Product Y
------------------------------------------------------------------MU X
MU Y
Quantity
Quantity
------------------------------------------------------------------1
32
1
24
2
28
2
20
3
24
3
16
4
20
4
12
5
16
5
8
------------------------------------------------------------------7) Refer to the above table. If the consumer buys both product X and product
Y, how much will the consumer buy of each to maximize utility?
A)
4X and 2Y
B) 3X and 4Y
C)
4X and 3Y
D) 5X and 3Y
8) Refer to the above table. When the consumer purchases the utilitymaximizing combination of product X and product Y, total utility will be:
A)
72
B)
84
C)
93
D)
156
9) Refer to the above table. Suppose that the consumer's income increased
from k.d 20 to k.d 30. What would be the utility-maximizing combination of
products X and Y?
A)
3X and 3Y
B)
4X and 4Y
C)
5X and 4Y
D)
5X and 5Y
10) Assume that a consumer purchases a combination of products A and B
and that the MU A / PA = 150 and MU B / PB = 100. To maximize utility,
without spending more money, the consumer should purchase:
A)
less of A and more of B.
B) less of B and more of A.
C)
more of both A and B.
D) less of both A and B.
11) A consumer's consumption of a third unit of a product per day would
increase total utility, while the consumption of a fourth unit would reduce it.
Which of the following statements is true?
A)
The product is an inferior good.
B)
A rational consumer would purchase the third unit.
C)
The consumer will switch expenditure to another product.
D)
The marginal utility of the product is zero somewhere between
the third and fourth unit .
12) Given the total utility for a consumer as shown in the table below, this
consumer begins to experience diminishing marginal utility when consuming
the:
Number of units Total utility
Of commodity
3
36
4
80
5
150
6
7
8
A)
B)
C)
D)
252
350
440
fourth unit of the commodity.
fifth unit of the commodity.
sixth unit of the commodity.
seventh unit of the commodity.
13) When marginal utility is decreasing but positive, total utility is:
A)
increasing at a decreasing rate.
B)
decreasing at a decreasing rate.
C)
increasing at an increasing rate.
D)
decreasing at an increasing rate.
14) According to utility theory, when total utility reaches a maximum, then
marginal utility is:
A)
increasing.
B) decreasing.
C)
at a minimum.
D)
equal to zero.
15) A consumer with a fixed income will maximize utility when each good is
purchased in amounts such that the:
A)
total utility is the same for each good.
B)
marginal utility of each good is maximized.
C)
marginal utility per one k.d spent is the same for all goods.
D)
marginal utility per one k.d spent is maximized for each good.
16) Assume that a consumer purchases a combination of product A and
product B such that the MU A / PA = 8 and MU B / PB = 6. To maximize
utility without spending more money, the consumer should:
A)
purchase less of product A and more of product B.
B)
purchase more of product A and less of product B.
C)
purchase more of both product A and product B.
D)
make no change in purchases of products A and B.
Problem sets :
(1) The table shows the total utility data for products X and Y . Assume that the
prices of X and Y are k.d 3 and k.d 4, respectively, and that consumer income is k.d
18 .
Units of Total Units of Total
X
utility
Y
Utility
1
9
1
16
2
15
2
28
3
19
3
36
4
5
21
22
4
5
40
42
(a) How many units of the two products will the consumer buy?
(b) What is the level of total utility for the consumer in equilibrium?
(c) If the price of X decreases to k.d 2, calculate the utility-maximizing combination
of the two products in this case.
(2) A consumer has an income of k.d 24 to spend each day. The only two goods the
consumer is interested in purchasing are goods A and B. The marginal-utility
schedules for these two goods are shown in the table below. The price of B does not
change and is k.d 2. The marginal utility per dinar from B is also shown in the table.
But the price of A varies as shown in the table. The marginal utility per dinar from A
when the price of A is k.d 8 and k.d 4 is shown in the following table.
Quantity
1
2
3
Good A
MU MU/kd 8 MU/kd 4
48
6
12
32
4
8
24
3
6
Good B
MU MU/kd 2
24
12
20
10
12
6
4
5
6
16
8
4
2
1
0.5
4
2
1
8
6
4
4
3
2
Complete the table below to show how much of A the consumer will buy each week
at each of the two possible prices of A. Also, show how much B will be demanded
when the price of A changes.
Price of A
k.d 8
k.d 4
Quantity of A
demanded
______
______
Price of B
k.d 2
k.d 2
Quantity of B
demanded
______
______
(3) A consumer finds only three products, X, Y, and Z, are for sale. The amount of
utility which their consumption will yield are as shown in the table below. Assume
that the prices of X, Y, and Z are k.d10, k.d 2, and k.d 8, respectively, and that the
consumer has an income of k.d 74 to spend.P
(a) Complete the following table by computing the marginal utility
per dinar for successive units of X, Y, and Z to one or two decimal
places.
(b) How many units of X, Y, and Z will the consumer buy when
maximizing utility and spending all income? Show this result using
the utility maximization formula.
(c) Why would the consumer not be maximizing utility by purchasing 2 units
of X, 4 units of Y, and 1 unit of Z?
Product X
Q
Utility
1
2
3
4
5
6
7
42
82
118
148
170
182
182
MU
per k.d
_____
_____
_____
_____
_____
_____
_____
Product Y
Q
Utility
1
2
3
4
5
6
7
14
26
36
44
50
54
56.4
MU
per k.d
_____
_____
_____
_____
_____
_____
_____
Product Z
Q
Utility
1
2
3
4
5
6
7
32
60
84
100
110
116
120
MU
per k.d
_____
_____
_____
_____
_____
_____
_____