Author Question: To maximize utility, why does a consumer consume the combination of goods that equates marginal ... (Read 87 times)

kellyjaisingh

  • Hero Member
  • *****
  • Posts: 540
To maximize utility, why does a consumer consume the combination of goods that equates marginal utility per dollar on the different goods rather than just equating the marginal utility of the different goods?
 
  What will be an ideal response?

Question 2

In a perfectly competitive market, a permanent increase in demand initially brings a higher price, economic
 
  A) loss, and entry into the market.
  B) loss, and exit from the market.
  C) profit, and entry into the market.
  D) profit, and exit from the market.



shaquita

  • Sr. Member
  • ****
  • Posts: 324
Answer to Question 1

The consumer equates the marginal utility per dollar on the goods because goods have different prices. For instance, the marginal utility of a Porsche might be 120,000 units and the marginal utility of a Hyundai might be 60,000 units. The consumer certainly prefers the Porsche to the Hyundai because the former has a greater marginal utility than the latter. However, we did not consider the prices. If the Porsche costs 120,000 and the Hyundai costs 10,000, the marginal utility per dollar on the Porsche is 1 and the marginal utility per dollar on the Hyundai is 6. A Hyundai gives the consumer more utility per dollar. Thus, when maximizing total utility, the consumer compares the marginal utility per dollar, not the marginal utility.

Answer to Question 2

C



Related Topics

Need homework help now?

Ask unlimited questions for free

Ask a Question
 

Did you know?

Methicillin-resistant Staphylococcus aureus or MRSA was discovered in 1961 in the United Kingdom. It if often referred to as a superbug. MRSA infections cause more deaths in the United States every year than AIDS.

Methicilli ...
Did you know?

The term bacteria was devised in the 19th century by German biologist Ferdinand Cohn. He based it on the Greek word "bakterion" meaning a small rod or staff. Cohn is considered to be the father of modern bacteriology.

Did you know?

It is important to read food labels and choose foods with low cholesterol and saturated trans fat. You should limit saturated fat to no higher than 6% of daily calories.

Did you know?

Thyroid conditions cause a higher risk of fibromyalgia and chronic fatigue syndrome.

Did you know?

Patients who have undergone chemotherapy for the treatment of cancer often complain of a lack of mental focus; memory loss; and a general diminution in abilities such as multitasking, attention span, and general mental agility.

For a complete list of videos, visit our video library