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    which of the following is considered to be a tell-tale signal that the point with the highest total utility has been found?

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    6.1 Consumption Choices – Principles of Economics

    6.1 CONSUMPTION CHOICES

    Learning Objectives

    By the end of this section, you will be able to:

    Calculate total utility

    Propose decisions that maximize utility

    Explain marginal utility and the significance of diminishing marginal utility

    Information on the consumption choices of Americans is available from the Consumer Expenditure Survey carried out by the U.S. Bureau of Labor Statistics. Table 1 shows spending patterns for the average U.S. household. The first row shows income and, after taxes and personal savings are subtracted, it shows that, in 2015, the average U.S. household spent $48,109 on consumption. The table then breaks down consumption into various categories. The average U.S. household spent roughly one-third of its consumption on shelter and other housing expenses, another one-third on food and vehicle expenses, and the rest on a variety of items, as shown. Of course, these patterns will vary for specific households by differing levels of family income, by geography, and by preferences.

    Average Household Income before Taxes $62,481Average Annual Expenditures $48.109

    Food at home $3,264

    Food away from home $2,505

    Housing $16,557

    Apparel and services $1,700

    Transportation $7,677

    Healthcare $3,157

    Entertainment $2,504

    Education $1,074

    Personal insurance and pensions $5,357

    All else: alcohol, tobacco, reading, personal care, cash contributions, miscellaneous $3,356

    Table 1. U.S. Consumption Choices in 2015(Source: http://www.bls.gov/cex/csxann13.pdf)

    TOTAL UTILITY AND DIMINISHING MARGINAL UTILITY

    To understand how a household will make its choices, economists look at what consumers can afford, as shown in a budget constraint line, and the total utility or satisfaction derived from those choices. In a budget constraint line, the quantity of one good is measured on the horizontal axis and the quantity of the other good is measured on the vertical axis. The budget constraint line shows the various combinations of two goods that are affordable given consumer income. Consider the situation of José, shown in Figure 1. José likes to collect T-shirts and watch movies.

    In Figure 1, the quantity of T-shirts is shown on the horizontal axis, while the quantity of movies is shown on the vertical axis. If José had unlimited income or goods were free, then he could consume without limit. But José, like all of us, faces a budget constraint. José has a total of $56 to spend. The price of T-shirts is $14 and the price of movies is $7. Notice that the vertical intercept of the budget constraint line is at eight movies and zero T-shirts ($56/$7=8). The horizontal intercept of the budget constraint is four, where José spends of all of his money on T-shirts and no movies ($56/14=4). The slope of the budget constraint line is rise/run or –8/4=–2. The specific choices along the budget constraint line show the combinations of T-shirts and movies that are affordable.

    Figure 1. A Choice between Consumption Goods. José has income of $56. Movies cost $7 and T-shirts cost $14. The points on the budget constraint line show the combinations of movies and T-shirts that are affordable.

    José wishes to choose the combination that will provide him with the greatest utility, which is the term economists use to describe a person’s level of satisfaction or happiness with his or her choices.

    Let’s begin with an assumption, which will be discussed in more detail later, that José can measure his own utility with something called utils. (It is important to note that you cannot make comparisons between the utils of individuals; if one person gets 20 utils from a cup of coffee and another gets 10 utils, this does not mean than the first person gets more enjoyment from the coffee than the other or that they enjoy the coffee twice as much.) Table 2 shows how José’s utility is connected with his consumption of T-shirts or movies. The first column of the table shows the quantity of T-shirts consumed. The second column shows the total utility, or total amount of satisfaction, that José receives from consuming that number of T-shirts. The most common pattern of total utility, as shown here, is that consuming additional goods leads to greater total utility, but at a decreasing rate. The third column shows marginal utility, which is the additional utility provided by one additional unit of consumption. This equation for marginal utility is:

    M U = c h a n g e i n t o t a l u t i l i t y c h a n g e i n q u a n t i t y

    MU=changeintotalutilitychangeinquantity

    Notice that marginal utility diminishes as additional units are consumed, which means that each subsequent unit of a good consumed provides less additional utility. For example, the first T-shirt José picks is his favorite and it gives him an addition of 22 utils. The fourth T-shirt is just to something to wear when all his other clothes are in the wash and yields only 18 additional utils. This is an example of the law of diminishing marginal utility, which holds that the additional utility decreases with each unit added.

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    Microeconomics Chapter 6 Flashcards

    Study with Quizlet and memorize flashcards terms like Refer to the diagram above. What is the significance of the point at the top of the backward bending of the supply curve marked L3?, Which of the following is considered to be a tell-tale signal that the point with the highest total utility has been found?, The step-by-step process of finding the choice with highest total utility involves a comparison of the: and more.

    Microeconomics Chapter 6

    5.0 1 Review

    Refer to the diagram above. What is the significance of the point at the top of the backward bending of the supply curve marked L3?

    Click card to see definition 👆

    as wages increase over this range, the quantity of hours worked actually decreases.

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    Which of the following is considered to be a tell-tale signal that the point with the highest total utility has been found?

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    the marginal utility per dollar is the same for both goods

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    1/21 Created by theother_51

    Terms in this set (21)

    Refer to the diagram above. What is the significance of the point at the top of the backward bending of the supply curve marked L3?

    as wages increase over this range, the quantity of hours worked actually decreases.

    Which of the following is considered to be a tell-tale signal that the point with the highest total utility has been found?

    the marginal utility per dollar is the same for both goods

    The step-by-step process of finding the choice with highest total utility involves a comparison of the:

    marginal utility gained and lost from different choices along the budget constraint.

    At point U, __________.

    P1/P2 = MU1/MU2

    The key assumption that accompanies the use of numbers for measuring utility is that:

    individuals choose based on their preferences

    Alex has $18 per week in his entertainment budget. He splits his time between going to the movies and renting video games. Each movie costs $6 while each video game rental costs $3. The measured total utility of each of his activities is shown in the table below. What is Alex's utility maximizing point?

    1 movie, 4 game rentals

    Economic theory offers ____________________ about the full range of possible events and responses, which can prevent __________________ about how households will respond to changes in prices or incomes

    a systematic way of thinking; misguided conclusions

    Which of the following occurs simultaneously with an income effect?

    substitution effect

    The term _________________ refers to the additional utility provided by one additional unit of consumption.

    marginal utility

    Marginal utility can:

    be positive, negative, or zero

    Jay and Jen are married with two children. They are preparing a household budget for the coming year. Based on statistical information for American households, approximately what portion of this family's annual consumption will most likely be budgeted for food and vehicle expenses?

    1/3

    Kim has $24 per week in her entertainment budget. She splits her time between going to the movies and yoga classes. Each movie costs $8 while each yoga class costs $3. The total utility from each of these activities is set out in the table below. What is Kim's total utility maximizing point?

    1 movie, 5 classes

    The term ___________________ is used to describe the common pattern whereby each marginal unit of a consumed good provides less of an addition to utility than the previous unit.

    diminishing marginal utility

    The most common pattern for marginal utility is ____________________.

    diminishing marginal utility

    Which of the following is most likely to cause variation in American household spending patterns?

    all of the above

    Economists are able to determine total utility by:

    summing up the marginal utilities of each unit consumed.

    The marginal utility of two goods changes ______________.

    with the quantities consumed.

    Refer to the diagram above. Which of the following is a true statement?

    backward-bending supply curves for labor are not typical in the short run

    The term _____________ describes a situation where a ________________ causes a reduction in the buying power of income, even though actual income has not changed.

    income effect; higher price

    Saving money is a(n) ____________________, because it involves less consumption in the present, but the ability to consume more in the future.

    intertemporal choice

    An inferior good is a product:

    for which demand decreases as income increases.

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