1. (Law of Diminishing Marginal Utility) S ome restaurants offer “all you can ea
ID: 1189208 • Letter: 1
Question
1. (Law of Diminishing Marginal Utility) Some restaurants offer “all you can eat” meals. How is this practice related to diminishing marginal utility? What restrictions must the restaurant impose on the customer in order to make a profit? (Answers may vary)
2. (Marginal Utility) Is it possible for marginal utility to be negative while total utility is positive? If yes, under what circumstances is it possible?
3. (Role of Time in Demand) In many amusement parks, you pay an admission fee to the park but you do not need to pay for individual rides. How do people choose which rides to go on? (Answers may vary)
4. What is the diamonds-water paradox, and how is it explained? Use the same reasoning to explain why bottled water costs so much more than tap water.
5. Please read Jane Katz’s “The Joy of Consumption: We Are What We Buy,” in the Federal Reserve Bank of Boston’sRegional Review at http://www.bos.frb.org/economic/nerr/rr1997/winter/katz97_1.htm and briefly discuss/summarize the evidence that Katz cites about how the rising value of time has affected consumer spending patterns.
6. Suppose that marginal utility of Good X = 100, the price of X is $10 per unit, and the price of Y is $5. Assuming that the consumer is in equilibrium and is consuming both X and Y, what must the marginal utility of Y be? (Hint: Please apply the formula: MUx/Px = MUy/Py)
7. What is consumer surplus? What happens to consumer surplus as price level falls?
8. Do you think any good which does not exhibit the law of diminishing marginal utility?
Explanation / Answer
1) A person cannot eat over a limit and that is the profit factor for all-you-can-eat restaurants. Diminishing marginal utility plays role in this case also because the satisfaction that the customer is getting from the first dish is highest and then it will keep on decreasing per dish. The restrictions that a restaurant should apply that there should a limited time to eat and the one deal should be applicable to one person.
2) If a person keeps on eating burgers then there will be a time where marginal utility is negative but the total utility that he has earned in total i.e. from the first burger till now, will be positive.
3) Suppose A has bought the ticket for the park. Now he will choose the rides in an order which maximizes the utility of the money spent in the park’s ticket. The rides he likes the most will provide maximum utility.
4) Diamond-water paradox says that although water is crucial for survival, still price of diamond is much more than water. The marginal utility achieved by bottled-water is more so people are ready to pay more for bottled water in comparison to tap water.
5) As time is a constraint, so with better technology and knowledge the value of time has risen and which in turn has affected the spending patterns like spending more to fly to a destination than going by land, medicines have increased lifetime but lifestyle experiences have increased much more. Comfort is becoming a integral part of the spending.
6) MUx=100 Px=10, MUy=? Py=5, So as per the formula given in hint MUy=50
7) Consumer surplus is the difference between the willingness to pay and the actual amount that has been paid. As price levels will fall, the consumer surplus will increase.
8) Wealth does not support law of diminishing marginal utility. As having more units of wealth does not means that happiness or the satisfaction is getting less per unit.