Chapter 3

Question 1

Utility is:

Answer 1

Utility does not mean the same as usefulness
Utility is subjective
Utility is difficult to quantify

Question 2

Total Utility (TU)

Answer 2

the total amount of satisfaction a person derives from
consuming some specific quantity of a good or a service.

Question 3

Marginal Utility (MU)

Answer 3

the extra satisfaction a consumer realizes from an additional unit of that product.
or
The change in total utility that results from the consumption of one more unit of a product.

Question 4

MU =

Answer 4

MU = ΔTU/ΔQ

Question 5

Weighted Marginal Utility (WMU)

Answer 5

the per-rand value extra satisfaction a consumer realizes from an additional unit of that product.

Question 6

WMU =

Answer 6

WMU = MU/price

Question 7

Law of diminishing marginal utility

Answer 7

satisfaction declines as a consumer consumes additional units of a given product.
The consumer will buy additional product only if the price falls

Question 8

Marginal utility and demand

Answer 8

The demand curve for a given product slopes downward due to the law of diminishing marginal utility.

Question 9

Consumer behaviour is affected by

Answer 9

Rational behaviour
Preferences
Budget constraints
Prices

Question 10

Prices

Answer 10

Goods are scarce relative to the demand for them, so every good carries a price tag.

Question 11

The utility maximizing rule

Answer 11

To maximize satisfaction, consumers should allocate their money income so that the last rand spent on each product yields the same amount of marginal utility.

Question 12

The income effect

Answer 12

the impact that a change in the price of a product has on a consumer’s real income and consequently on the
quantity demanded of the good.

Question 13

The substitution effect

Answer 13

the impact that a change in a product’s price has on its relative expensiveness and consequently on the quantity demanded.

Question 14

To derive a demand curve:

Answer 14

Money income remains the same
Focus on one good
Assume the price of the other good remains the same

Question 15

Algebraic formula for utility maximization:

Answer 15

MU of product A/Price = MU of product B/price

WMU of A = WMU of B

Question 16

Indifference Curve

Answer 16

Shows all the combinations of products A and B that will yield the same total satisfaction or total utility to he consumer.
The consumer, hence, will be indifferent as to which combinations is actually obtained.

Question 17

Indifference Curves are _____ sloping

Answer 17

Downward sloping
More of one product means less of the other if the total utility is to remain unchanged

Question 18

Indifference Curves are ______ to the origin

Answer 18

Convex to the origin

Question 19

The slope of the indifference curve at each point:

Answer 19

= Marginal rate of substitution (MRS)
Indifference curves are convex to the origin. The slope of a curve at a particular point is measured by drawing a straight line tangent to that point.
These slopes decline in absolute terms as we move
down the curve.
The slope at each point measures MRS

Question 20

Marginal Rate of Substitution (MRS)

Answer 20

The rate at which the consumer who possesses the combination will substitute one good for the other to remain equally satisfied.

Question 21

Indifference map

Answer 21

A series of indifference curves. Each curve shows a different level of total utility: they never cross each other.
Curves farther from the origin indicate higher levels of total utility.
Which of the combinations will maximize utility?
- use budget constraint

Question 22

Budget line (constraint)

Answer 22

It is a schedule or curve showing various combinations of two products a consumer can purchase with a specific money income.

Question 23

The slope of the budget line:

Answer 23

The slope measures the ratio of the price of A to the price of B
=Pa/Pb

Question 24

Attainable combinations

Answer 24

All the combinations on or inside the budget line are attainable

Question 25

Unattainable combinations

Answer 25

All the combinations beyond the budget line are unattainable.

Question 26

Budget lines: opportunity cost

Answer 26

The straight-line budget constraint, with its constant slope, indicates constant opportunity cost.

Question 27

Income changes

Answer 27

The location of the budget line varies with money income Increase in income: shifts the budget line to the right Decrease in income: shifts the budget line to the left

Question 28

Price changes

Answer 28

Change in product prices shifts the budget line.

Question 29

Equilibrium position at tangency

Answer 29

The utility-maximizing combination will be the combination lying on the highest attainable indifference curve.

Question 30

Equilibrium position is where:

Answer 30

MRS = Pb/Pa Equilibrium position is where the slope of the indifference curve = slope of the budget line.

Question 31

Derivation of the demand curve: Marginal utility theory

Answer 31

Assumes that utility is numerically measurable: The consumer can say how much extra utility can be gained from an extra unity of A or B WMU of A = WMU of B (MU of A/Price A = MU of B/Price B)

Question 32

Derivation of the demand curve: Indifference curve approach

Answer 32

The consumer needs only to specify whether a particular combination of A and B will yield: more than, less than or the same amount of utility as some other combination. MRS = Price B/Price A