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Economics Chap 6

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March 16, 2016

Chapter 6 and answer the following questions:

1. (Law of Diminishing Marginal Utility) Some restaurants offer “all you can eat” meals. How is this practice related to diminishing marginal utility? What restrictions must the restaurant impose on the customer in order to make a profit? (Answers may vary)

The marginal utility derived from each additional plate of food will diminish as you become full. The marginal utility will continue to decrease until it reaches zero or becomes negative. Food shows diminishing marginal utility after a certain amount has been consumed. The restaurant must require that the consumer not take food home and that the consumer not share the meal with others at the table.

2. (Marginal Utility) Is it possible for marginal utility to be negative while total utility is positive? If yes, under what circumstances is it possible?

Yes, it is possible. Total utility rises as long as marginal utility is positive. When total utility starts to drop, marginal utility becomes negative. Total utility is still positive as long as the negative marginal utilities are not sizable enough to completely offset the positive marginal utilities on earlier units of consumption.

3. (Role of Time in Demand) In many amusement parks, you pay an admission fee to the park but you do not need to pay for individual rides. How do people choose which rides to go on? (Answers may vary)

The rides are allocated on the basis of the time costs incurred while standing in line waiting for the ride. Those who really prefer a particular ride or those who have abundant time available will be willing to wait longer. Those with little time available may elect to ride other less crowded but also less thrilling rides.

4. What is the diamonds-water paradox, and how is it explained? Use the same reasoning to explain why bottled water costs so much

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