Question

Which statement is true? (LO1, 6) a) Most people have the same utility schedules. b) Most people enjoy a consumer surplus for at least some of the things they buy. c) We will consume additional units of a product until our consumer surplus is zero. d) The utility of a product is measured by its usefulness.

Short answer

The correct answer is b) Most people enjoy a consumer surplus for at least some of the things they buy.

Step-by-step solution

Understanding utility and utility schedules

Utility is the satisfaction or pleasure that a consumer receives from the consumption of a good or service. A utility schedule is a table showing different levels of satisfaction or utility that a person derives from consuming different quantities of a good or service. People have different preferences and priorities, so they may have different utility schedules for various goods or services. Hence, a) is not true.

Understanding consumer surplus

Consumer surplus is the difference between the highest price a consumer is willing to pay for a good or service and the actual price they pay. Since the price that a person is willing to pay generally decreases as they consume more units of a good, most people enjoy a consumer surplus for at least some of the things they buy, due to the decrease in their willingness to pay provoked by the law of diminishing marginal utility. Therefore, b) is true.

Understanding diminishing marginal utility

According to the principle of diminishing marginal utility, the additional satisfaction (marginal utility) a consumer receives from each additional unit of a good or service they consume decreases as they consume more units. This means that even if consumers continue to consume more units of a good or service, their marginal utility will eventually decline to zero or even become negative. Hence, c) is also not true.

Understanding the measure of utility

Although utility is often associated with the usefulness or practicality of a product, in economics, it is measured by the satisfaction that a consumer derives from a product. Thus, a product can have a high utility even if it isn't "useful" in a practical sense, as long as it brings satisfaction or pleasure to the consumer. This means that d) is not true. Based on the above explanation, the true statement among the given options is: b) Most people enjoy a consumer surplus for at least some of the things they buy.

Key concepts

Utility in Economics

Utility refers to the satisfaction or pleasure a person gains from consuming a product or service. In economics, it's a fundamental concept representing the perceived value that consumers derive from goods and services, rather than their intrinsic usefulness.

Imagine you’re at a coffee shop, deciding whether to buy a second cup of coffee. The first cup brought you a great deal of satisfaction, perhaps it was exactly what you needed to start your day. The utility you received from that first cup was high. When you contemplate a second cup, you're evaluating the expected utility; will it make you as satisfied as the first, or less so?

This concept is important in helping economists understand consumer behavior, predict market trends, and determine pricing strategies. Utility can be thought of as the 'currency' of personal satisfaction, quantifying happiness in a way that can be analyzed and applied within an economic framework.

Diminishing Marginal Utility

Diminishing marginal utility is a principle that states that as a consumer consumes more of a good or service, the additional satisfaction gained from each new unit decreases. It's like eating your favorite slice of pizza; the first slice is delicious, the second one is good, but by the fifth or sixth slice, it doesn’t give you the same joy.

Why is this concept crucial? It explains why businesses can't sell unlimited quantities of their product at a constant price. The value consumers place on additional units falls, so they are only willing to buy more at a lower price point. This principle is fundamental to price setting, understanding market demand, and explaining the downward slope of the demand curve in economics.

It also underpins the consumer surplus idea, since individuals typically purchase items up until the point where their perceived value (utility) matches the market price, capturing surplus satisfaction on earlier units where their utility exceeded the price paid.

Utility Schedule

A utility schedule is a tabular representation of the amount of satisfaction or utility a person gets from consuming different quantities of a good or service. It's a practical tool used to visualize how utility changes with consumption and reinforce the concept of diminishing marginal utility.

To construct a utility schedule, imagine listing down how many units of a good — let’s say apples — you consume on the first column, and on the second, you mark down the level of satisfaction or utility derived from each apple eaten. Initially, the utility may increase as you enjoy the first few apples, but as you continue eating more, the increase in utility with each additional apple starts to wane.

This schedule can be personalized as every individual values goods differently, which reflects the subjective nature of utility. It's a useful framework for individuals, businesses, and economists to understand how much consumers may be willing to consume and pay, influencing market dynamics and individual consumption decisions.