Order Consumer Behaviour Discussion Questions

Order Consumer Behaviour Discussion Questions
Order Consumer Behaviour Discussion Questions
Question 2
a) The appropriate diagrams for (a) and (c) are shown below. Note that the horizontal
scales for both diagrams are the same but the vertical scales are different. Note also that
marginal utility is plotted between the integer values for the number of avocados
consumed because marginal utility measures the change in utility from consuming one
more avocado.
b) The marginal utility is the change in utility divided by the change in the number of
units consumed. The marginal utilities are given in the following table:
Change in
0th to 1st 100
1st to 2nd 85
2nd to 3rd 60
3rd to 4th 40
4th to 5th 30
5th to 6th 20
6th to 7th 10
7th to 8th 5
c) The graph of marginal utility is shown above.
d) Brett likes avocados, and each extra avocado may well increase his total utility. But
after some point (and perhaps right away, as in this case), each successive avocado adds
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less to his total utility (or satisfaction) than the previous one. That is, the utility that Brett
gains from each extra avocado falls, though it may still be a positive amount. Most of us
have experienced this phenomenon, whether it be with cold beverages on a sunny day,
pieces of pizza, or meals at a nice restaurant.
Question 4
a) The sum of Rupert’s willingness to pay for the first five pizzas is 18 16 13 9 4
= $60. Thus Rupert would be willing to pay $60 per week for these five pizzas — this is
the total value that Rupert places on five weekly pizzas.
b) Rupert will purchase pizzas until his willingness to pay for the next pizza is less than
the market price. At a price of $10 per pizza, Rupert will buy three pizzas per week.
c) The total value that Rupert places on the three pizzas is 18 16 13 = $47. The
amount Rupert must spend to buy them is $10 per pizza times three pizzas, or $30. Thus
Rupert’s consumer surplus is $17.
Question 6
b) The new equilibrium price is p1 and quantity is Q1. Consumer surplus is now given by
the triangle ACE.
c) On the original Q0 units, the lower price means more consumer surplus, given by the
rectangle ABDF.
d) The triangle FDE is the new consumer surplus earned o the new (Q1 – Q0) units.
Question 8
This is a good question to emphasize the difference between total and marginal value and
to clarify how changes in market price are related to changes in either total or marginal
a) The rightward shift of the demand curve reflects the fact that consumers now place more
total value on this item (or, in other words, more value for any given quantity). Thus, for
any given quantity of the product, the area under the demand curve has increased.
b) In equilibrium, the marginal value of X has not changed, even though the total value has.
The reason is that, in this case, the supply curve is perfectly elastic, and so the equilibrium
market price is unaffected by the increase in demand. So consumers still consume X until
the marginal value is equal to the market price, but the latter is unchanged and thus so is the
c) The total value that consumers place on a given quantity of Y is unchanged—the
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demand curve for Y has not moved.
d) The increase in supply drives down the price. The reduction in price leads consumers
to consume more of Y until the marginal value is just equal to the price. But since the
price has fallen, the value of Y at the margin has also fallen, even though there has been
no change in preferences (the demand curve hasn’t moved at all).
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