Suppose a family purchases 10,000 gallons of water a year at 20 cents a gallon and one diamond ring at a price of $1,000. Can we conclude that the diamond ring provides more utility to the family than water? Explain
What will be an ideal response?
No. In fact, the water provides more total utility than the diamond. We know that the (MU of the last gallon of water)/($0.20 ) = (MU of the ring)/($1,000). This implies the MU of the ring is 5,000 times more than the MU of the last gallon of water. Further, the total utility of the ring equals marginal utility since only one ring was purchased. Given the law of diminishing marginal utility, the total utility must be more than 10,000 times greater than the marginal utility of the 10,000th gallon, so the total utility for the water must be greater than the total utility of the diamond.
You might also like to view...
Refer to Table 6-7
a. Using the information in the table, calculate the income elasticity of demand for good X and characterize the good. Use the midpoint formula. b. Can you calculate the income elasticity of demand for good Y? If you can, show your calculation and characterize the good. If you cannot, explain why.
Most of the taxes collected by governments tend to
a. remain fixed. b. move in the opposite direction from GDP. c. be sales taxes. d. rise and fall with the level of GDP.
A ban on leaded gasoline has reduced ____________ pollution.
Fill in the blank(s) with the appropriate word(s).
Which of the following is true about an increase of a per-unit tax in a goods market where the good is quasilinear assuming neither supply nor demand is perfectly inelastic:
A. The more price elastic either demand or supply, the lower will be tax revenue. B. The more price elastic either demand or supply, the greater will be deadweight loss. C. The higher the tax rate, the greater the fraction of deadweight loss over revenue. D. Both (a) and (b) E. Both (b) and (c) F. Both (a) and (c) G. All of the above H. None of the above