Review Questions
Who determines how much utility an individual will receive from consuming a good?
Would you expect total utility to rise or fall with additional consumption of a good? Why?
Would you expect marginal utility to rise or fall with additional consumption of a good? Why?
Is it possible for total utility to increase while marginal utility diminishes? Explain.
If people do not have a complete mental picture of total utility for every level of consumption, how can they find their utility-maximizing consumption choice?
What is the rule relating the ratio of marginal utility to prices of two goods at the optimal choice? Explain why, if this rule does not hold, the choice cannot be utility-maximizing.
As a general rule, is it safe to assume that a change in the price of a good will always have its most significant impact on the quantity demanded of that good, rather than on the quantity demanded of other goods? Explain.
Why does a change in income cause a parallel shift in the budget constraint?
How will a utility-maximizer find the choice of leisure and income that provides the greatest utility?
As a general rule, is it safe to assume that a higher wage will encourage significantly more hours worked for all individuals? Explain.
According to the model of intertemporal choice, what are the major factors which determine how much saving an individual will do? What factors might a behavioral economist use to explain savings decisions?
As a general rule, is it safe to assume that a lower interest rate will encourage significantly lower financial savings for all individuals? Explain.