The difference between the price of one product and the total budget is referred to as a “util.”
True
False
Pick only one of the questions below to answer. Be sure to answer with less than 3 paragraphs. If you wish to use graphs or tables, feel free to add them.
1. Explain the difference between the two different models of choice and decision making seen in this class. We saw in Module 1 (Lecture 4, Making Optimal Decisions) that “how-much decisions” are a matter of finding an optimal quantity that maximizes a net-benefit, where a marginal benefit is equal to a marginal cost. How is the model of consumer choice different from this simple model of decision making? In what ways are the models of decision making similar? Or are they the same? And if they are the same, then what are the marginal benefits and marginal costs for the consumers in deciding their optimal bundle? What role does the budget play in the difference between these two models of decision making?
2. Give an example of a choice you have faced where an indifference curve was implicitly at work. Describe how the two things you had to choose between created a level curve of indifference. Be sure to describe how the marginal rate of substitution changed (or did not change) over the quantities of two goods in your situation. How did you measure these trade-offs? How did diminishing marginal utility appear in this situation?
3. Describe how the model of consumer choice would explain your decision-making process while shopping at a grocery store. Use the concepts of budget constraint, marginal utility, and marginal utility per dollar in your description. To help, you might choose two products you can buy at a grocery store and create marginal utilities over the quantities of these products. Then, with the help of some prices, describe how you arrive at the optimal bundle.
4. Describe how a change in the price of a product affects the optimal bundle of a consumer. For example, when the price of one product increases, what happens to the optimal quantity of both products? How does such a change in the optimal bundle describe the demand curve of one of the products in the bundle? If the price of one product changes and the optimal bundle changes as a result, then what does this tell us about complementary and substitute products (which we learned about in Module 1)?
