Explain what is meant by diminishing marginal utility

Reference no: EM133595684

Problem

Utility maximization is a fundamental concept in consumer theory.

1. Explain what is meant by diminishing marginal utility.

2. Assume that a consumer buys only two goods: D and Z. What is the utility-maximizing decision rule for the consumer in allocating total income to good D and good Z?

3. Assume that a utility-maximizing consumer is spending all of her income on the two goods, D and Z. The price per unit of good D is $2, and the price per unit of good Z is $3. The marginal utility of the last unit of good Z consumed is 15. What is the marginal utility of the last unit of good D consumed?

4. Assume that good D is a normal good and good Z is an inferior good. Assume that the consumer's income does not change. Assume that the price of good D increases.

a. Indicate how the substitution effect of the increase in the price of good D will affect purchases of

(i) Good D (ii) Good Z

b. Indicate how the income effect of the increase in the price of good D will affect purchases of

(i) Good D (ii) Good Z.

Reference no: EM133595684

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