7) At The Margin - MB

Question 1

At the Margin:

what is marginal principle?

Answer 1

the idea that economic agents may take decisions by considering the effect of small changes from the existing (usually one more)

Question 2

At the Margin:

what is rational decision making?

Answer 2

a decision that allows an economic agent to maximise their objective, by setting the marginal benefit of and action equal to its marginal cost

Question 3

At the Margin:

what is utility?

Answer 3

the satisfaction recieved from consuming a good or service

Question 4

At the Margin:

what is marginal utility?

Answer 4

additional utility gained from consuming an extra unit of a good or service

Question 5

At the Margin:

what is law of diminishing marginal utility?

Answer 5

states that the more units of a good that are consumed, the lower the utility from consuming those additional units

Question 6

At the Margin:

what is the margin?

Answer 6

the change in variable caused by an increase of one unit of another variable

Question 7

At the Margin:

what is total utility?

Answer 7

overall benefit gained from consuming a good

Question 8

At the Margin:

how does the law of diminishing marginal utility link to marginal utility?

Answer 8

the law of diminishing marginal utility tells us that with each additional unit of a good that is consumed, the marginal utility gained decreases to zero, and then becomes negative

Question 9

At the Margin:

what happens when marginal utility decreases with each extra good consumed?

Answer 9

then the price a consumer is willing to pay for each extra good will decrease. This explains why an individuals demand curve slopes downwards.

Question 10

At the Margin:

what does the marginal concept allow the government?

Answer 10

allows the government to make incremental (increase) improvements to spending decisions

Question 11

At the Margin:

what does the marginal concept allow for firms?

Answer 11

allows firms to decide when to stop increasing production to maximise profits

Question 12

At the Margin:

what does the marginal concept allow for households?

Answer 12

allows households to decide when to stop consumption or when to offer more labour

Question 13

At the Margin:

when is marginal concept not useful for decision making for government?

Answer 13

not all decisions are based on making incremental changes - governments often make large changes where margin cannot apply

Question 14

At the Margin:

when is marginal concept not useful for decision making for firms

Answer 14

firms are unlikely to have all the information needed to calculate marginal values ex ante. They will probably only have the information ex post

Question 15

At the Margin:

when is marginal concept not useful for decision making for households?

Answer 15

households are unlikely to have the knowledge to process decisions in this way