Question

Which statement is true? \((\mathrm{LO} 1,6)\) 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 true statement is b) Most people enjoy a consumer surplus for at least some of the things they buy. This is because consumer surplus arises when the price of a good or service is lower than the maximum amount that consumers are willing to pay, and it is common for consumers to purchase products at a price lower than their perceived value due to competition, discounts, or promotional offers.

Step-by-step solution

Understanding Utility and Consumer Surplus

Utility is a term used in economics to describe the satisfaction or wellbeing a consumer experiences when consuming a good or service. It cannot be directly measured because it is subjective to each person. However, it can be compared for different goods and individuals, and it plays a crucial role in demand analysis and consumer decision-making. Consumer surplus is the difference between the total amount that consumers are willing to pay for a good or service and the total amount that they actually pay. It's a measure of the benefit or satisfaction that buyers receive from buying those goods or services. When consumers buy a product at a price lower than they are willing to pay, they enjoy a consumer surplus. Now, let's analyze each statement and determine which one is true.

Analyzing Statement A

a) Most people have the same utility schedules. This statement is false. As mentioned earlier, utility is subjective to each person, meaning that different people derive different levels of satisfaction from consuming the same good. Thus, it is incorrect to assume that most people have the same utility schedules.

Analyzing Statement B

b) Most people enjoy a consumer surplus for at least some of the things they buy. This statement is true. Consumer surplus arises when the price of a good or service is lower than the maximum amount that consumers are willing to pay for it. Often, due to competition, discounts, or promotional offers, consumers can buy goods or services at a lower price than their perceived value, resulting in a consumer surplus. Therefore, it is reasonable to assume that most people enjoy a consumer surplus for at least some of the things they buy.

Analyzing Statement C

c) We will consume additional units of a product until our consumer surplus is zero. This statement is false. A consumer's decision to consume additional units of a product depends on the marginal utility, which is the additional satisfaction derived from consuming one more unit of a good. Consumers typically consume additional units until the marginal utility equals the price of the good, not when their consumer surplus is zero.

Analyzing Statement D

d) The utility of a product is measured by its usefulness. This statement is false. Utility is a subjective concept that measures a person's satisfaction or wellbeing when consuming a good or service. The usefulness of a product is only one factor that contributes to utility. Consumers may derive utility from other factors, such as the product's aesthetic, symbolic value, or status-enhancing features. Thus, the utility of a product cannot be solely measured by its usefulness. Based on our analysis, statement B is the only true statement.

Key concepts

Utility in Economics

When discussing utility in economics, we're referring to the inherent satisfaction and value a consumer derives from the use or consumption of a good or service. It's a key concept in understanding consumer behavior and is central to the theory of demand. Unlike tangible measures such as cost or price, utility is a more abstract and personal approach. It is indeed correct to say that utility cannot be expressed in concrete units due to its subjective nature. Each person's preferences and circumstances differ, leading to a unique utility they attribute to any given product.

Interpreting utility quantitatively, economists often use the concept of a 'utility function' to represent the relationship between consumption of goods and the satisfaction level of a person. These models help in simplifying the complexity of human preferences but they are still just simplified models of a much more complicated reality.

Demand Analysis

Demand analysis is a vital tool used by economists to understand consumer behavior and market dynamics. It involves examining how consumers react to changes in price, income, and other factors. The analysis evaluates the relationship between the quantity of a good consumers are willing to purchase and the price of that good.

One essential aspect of demand analysis is understanding how consumer surplus is generated. Consumers have different maximum prices they're willing to pay for a product, based on their utility for it. The market price often ends up being lower than many consumers' maximum price, which is why, as the exercise correctly points out, most people enjoy a consumer surplus for some of their purchases. Demand analysis can help businesses set prices that optimize their revenue while taking into consideration the consumer surplus to maintain a satisfied and loyal customer base.

Marginal Utility

Marginal utility refers to the added satisfaction a consumer gets from consuming one additional unit of a good or service. It's a cornerstone concept in microeconomics because it's used to determine the quantity of a good a consumer is willing to buy. Marginal utility generally decreases as more units are consumed, which economists refer to as 'diminishing marginal utility'.

Understanding marginal utility is crucial when it comes to making consumption decisions. If the marginal utility of consuming an extra unit of a product is greater than the cost, a rational consumer is likely to purchase it. Conversely, consumption will stop once the marginal utility falls below the cost of the product. This analysis helps explain why statement C from the exercise is false: consumers don't consume until consumer surplus is zero; they consume until the marginal utility is equal to the price of the good. This principle also underlies the supply and demand balance in market economics, influencing pricing strategies and market equilibrium.