MARILOU G.
GABAYA
Problem Exercises on Consumer Behavior
Law of Diminishing Marginal Utility. Indicate whether each of the following statements is true
or false. Explain your answer in 2 sentences only.
a. The law of diminishing marginal utility states that as an individual increases consumption of
a given product within a set of period of time, the utility gained from consumption
eventually declines.
Ans. - True. The satisfaction of consuming additional units of a good will decrease as the
consumption of the goods increase. Consumers value additional units of goods less than they
valued those consumed before.
b. When prices are held constant, a diminishing marginal utility for consumption decreases the
cost of each marginal unit of satisfaction.
Ans. - True. The first unit of consumption for any product is typically the highest, with
every unit of consumption to follow holding less and less utility. Consumers handles the law of
diminishing marginal utility by consuming numerous quantities of various goods.
c. Marginal utility measures the added satisfaction derived from a 1-unit increase in
consumption, holding consumption of other goods and services constant.
Ans. -True. It is the measure of the additional value or happiness a consumer gets from
one or more unit of their consumption and not their total satisfaction from all units of
consumption.
d. When goods are relatively scarce, the law of diminishing marginal utility means that the
added value of another unit of goods will be small in relation to the added value of another
unit of services.
Ans. - False. If goods are relatively scarce, the added value of another unit of goods will
be higher. Consumers will pay a high price just to be in possession of anothe runit.
e. The law of diminishing marginal utility gives rise to a downward-sloping demand curve for all
goods and services.
Ans. -True. Since each additional units of goods provides less additional benefits
consumers will not willing be to pay as much for each additional unit.
Elasticity. The demand for personal computers can be characterized by the following
elasticities: price elasticity = -5; cross-price elasticity with software = -4; and income elasticity = 2.5.
Indicate whether each of the following statements is true or false, and explain your answer.
a. A price reduction for personal computers will increase both the number of units demanded
and the total revenue of sellers.
Ans. - True. The demand is elastic. The price and the total revenue change in the
opposite directions.
b. The cross-price elasticity indicates that a 5% reduction in the price of personal computers
will cause a 20% increase in software.
ns. - True. The quantity demanded of the good and the price of one of its complements,
change in opposite directions.
c. Demand for personal computers is price elastic and computers are cyclical normal goods.
Ans. - True. Since the price is elastic whenever there is a price increase, the quantity
demanded for computers will decrease.
d. Falling software prices will increase revenues received by sellers of both computers and
software.
Ans.- True as the prices decreases, the quantity demanded will increase so as its
revenues.
Cross-price elasticity. The South Beach Café recently reduced appetizer prices from P12 to P10
for afternoon early bird customers and enjoyed a resulting increase in sales from 90 to 150 orders per
day. Beverage sales also increased from 300 to 600 units per day.
a. Calculate the arc price elasticity of demand for appetizers.
Ans.
Price elasticity of demand= 60
x100 50
120
-2.99 or -3
-2
x100 -16.67
12
b. Calculate the arc cross-price elasticity of demand between beverage sales and appetizer
prices.
Ans.
Cross elasticity of demand =
600-300
x100 100
300
-5.99 or -6
10-12
x100 -16.67
12
c. Holding all else equal, would you expect an additional appetizer price decrease to P8 to
cause both appetizer and beverage revenues to rise? Explain.
Ans. No, with the decrease in price of appetizer, the revenue will fall down.
P10 P8
appetizers 10x150 sales=1500 revenue 8x150=1200 revenue
bverages 10x600 sales=6000 revenue 8x600=4800 revenue
