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Microeconomics Final Notes
Contains theory, explanatory graphs and charts, solved practice exercises and more.
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TOPIC 1BEHIND THE DEMAND CURVE
1. Utility and consumers
Some assumptions that will help:
- All goods have utility.
Utility: value or satisfaction from consumption.
Marginal utility (MU): the change in utility from consuming an additional unit.
- There is no saving. Consumers spend all income (ignore future consumption for now).
- Marginal utility diminishes over time.
Diminishing marginal utility: Each additional unit of a good adds less to utility than the
previous unit.
Assumptions help us simplify a complex reality
• It is very important to be aware of the underlying assumptions of an economic model.
• Over the chapter, think about whether our assumptions are reasonable or make sense to you.
• A model’s predictions may be misleading if the model’s assumptions are wrong
, 2. Utility and Marginal Utility
• Cassie’s total utility depends on her consumption of fried clams.
• It increases until it reaches its maximum utility level of 64 utils at 8 clams consumed and
decreases after that.
• The marginal utility curve slopes downward due to diminishing marginal utility; each
additional clam gives Cassie less utility than the previous clam.
• Note that the 9th clam is “too much.”
PRACTICE 1
Assume that the marginal utilities for the first three units of a good consumed are 200, 150,
and 125, respectively. The total utility when two units are consumed is:
a) 150.
b) 200.
c) 350.
d) 475.
PRACTICE 2
Joe’s marginal utility from consuming the fourth slice of pizza equals:
a) 60 utils.
b) 40 utils.
c) 280 utils.
d) 20 utils.
PRACTICE 3
-Is Marginal Utility really Diminishing? Not always
-Are all goods subject to Diminishing Marginal Utility? No. For example: goods we need to
learn to do/like; or paint
,PRACTICE 4
I drink 3 cups of coffee a day. I have diminishing Marginal Utility.
- Which cup generates the greatest increase in total utility? First
- And which generates the least? Third
3. The budget constraint
• A budget constraint requires that the cost of a consumer’s consumption bundle be no more
than the consumer’s total income
• A consumer’s consumption possibilities is the set of all consumption bundles that can be
consumed given the consumer’s income and prevailing prices.
• A consumer’s budget line shows the consumption bundles available to a consumer who
spends all of his or her income
, PRACTICE 5
PRACTICE 6
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