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In this case (as in Example 8D), the utility-maximizing combination is seven units of Good X and one unit of Good Y. The marginal utility of the seventh unit of Good X is 10 utils. The marginal utility of the first unit of Good Y is 30 utils. So the marginal rate of substitution will be 3 units of Good X for 1 unit of Good Y. This is also the slope of the budget constraint (since the price of Good Y is 3 times the price of Good X). With the increase in the price of Good Y from $1 to $3, the quantity demanded of Good Y decreases from four units to one unit. So we can derive a demand curve for Good Y. See the graph below: Price $ 4- 3- 2- 1- 0 0 1 2 3 4 5 D Quantity Demanded Appendix: The Efficiency of Money Gifts In terms of efficiency, money gifts are superior to nonmoney gifts. If a money gift is given, the recipient can use the money to purchase the goods that will provide the most marginal utility to the recipient. Example 13: Sheila receives a gift of diamond earrings costing $250 from her aunt. If Sheila had received $250 from her aunt, she could have spent the money on exactly the goods that would give her the most marginal utility. It is possible that Sheila would purchase the earrings, but probably not. Study Guide for Chapter 18 Chapter Summary for Chapter 18 Utility is a measure of the satisfaction received from the consumption of a good. The best measure of the utility that a person receives from consuming a good is the price that the person is willing to pay for the good. Since consumers do not all have the same amount of income, price does not provide an objective comparison of the utility received by different persons. Marginal utility is the additional utility received from consuming an additional unit of a good. According to the law of diminishing marginal utility, the marginal utility from consuming additional units of a good eventually declines. The law of diminishing marginal utility seems to indicate that additional income would provide greater utility to a low-income person than to a high-income person. However, the utility received by one person cannot be scientifically or objectively compared to that received by another person. FOR REVIEW ONLY - NOT FOR DISTRIBUTION Utility 18 - 8
The diamond-water paradox is the observation that essential goods are often lower priced than non-essential goods. The explanation of the paradox is that the price of a good is equal to the marginal utility of the last unit consumed. Water is more valuable than diamonds in terms of total utility, but diamonds have a higher marginal utility. Consumers want to maximize the total utility that they receive from their limited incomes. To maximize total utility, consumers will want to follow two rules; (1) always choose the marginal unit of the good that yields the most marginal utility per price, and (2) always choose the combination of goods that equalizes the ratio of marginal utility per price for all goods. If the government provides essential goods free of charge, no one will have to do without essential goods. If the government provided essential goods free of charge, consumers would overconsume these “free” goods, consuming up to the quantity where the marginal utility of the goods would be zero. The marginal cost of producing the goods would be greater than zero. If society wishes to provide essential goods to low-income persons, it is more efficient to provide additional income to the low-income persons. More units of a good should be produced as long as the marginal utility of the good exceeds the marginal cost. The optimal quantity of a good to produce is where marginal utility and marginal cost are equal. The optimal level of any activity occurs where marginal benefit and marginal cost are equal. Questions for Chapter 18 Fill-in-the-blanks: 1. ______________________ is a measure of the satisfaction received from the consumption of a good. 2. ______________________ ______________________ is the additional utility received from consuming an additional unit of a good. 3. The diamond-water ______________________ is the observation that essential goods are often lower priced than non-essential goods. 4. A(n) ______________________ curve is a curve showing different combinations of two goods that provide equal total utility to a consumer. 5. A(n) ______________________ _____________________ is a curve showing the different combinations of two goods that a consumer can purchase with a certain amount of income. Multiple Choice: ___ 1. Utility: a. is a measure of the satisfaction received from the consumption of a good b. has a standardized meaning c. can be compared objectively between different persons d. All of the above ___ 2. The utility received by two different persons from consuming a good: a. can be compared objectively by looking at the price each is willing to pay for the good b. can be compared objectively by asking each person how strongly they desire the good c. cannot be compared objectively since the two different persons may have unequal income d. Both a. and b. above FOR REVIEW ONLY - NOT FOR DISTRIBUTION 18 - 9 Utility
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PRINCIPLES OF ECONOMICS JEFF HOLT S
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Principles of Economics, 6th Editio
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16. Study Guide for Chapter 7 17. C
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11. Appendix: Book Review - “The
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20. Appendix: The NCAA Cartel 21. S
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Introduction: A Brief History of U.
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In the twentieth century, per capit
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Appendix: The 35 Largest National E
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Multiple Choice: ___ 1. The Jamesto
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2. Describe the economic cost of th
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Chapter 1 Scarcity and Choices The
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Example 5B: At the end of 1982, the
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Example 11: When Cindy quits her jo
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consequences may result in failure
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An upward sloping curve (as in Exam
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In making decisions, humans tend to
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5. ______________________ _________
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___ 13. If the value of one variabl
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Y Point X Y A 0 1 B 3 3 C 6 5 D 9 7
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Chapter 2 Trade and Economic System
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Example 4B: The following quantitie
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1. An increase in the quantity of r
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3. For whom to produce? This is det
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The graph below illustrates the shi
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The two primary economic systems ar
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___ 12. The capitalist vision sees
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___ 25. According to the book “Ca
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Chapter 3 Demand, Supply, and Equil
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. For inferior goods, income and de
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The same information can be placed
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Not only does a free market elimina
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$7 - 6 - 5 - S 3 S1 S 2 Price 4 - 3
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Example 17: The graph below illustr
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Questions for Chapter 3 Fill-in-the
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___ 12. Assuming a market originall
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$8 - 7 - 6 - 5 - Price 4 - 3 - 2 -
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Chapter 4 Inflation and Unemploymen
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Computing the Rate of Inflation The
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Full Employment Though unemployment
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3. Cyclical unemployment - due to d
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During the Great Depression, the ec
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Appendix: Think Like an Economist -
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Answer questions 8. and 9. based on
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___ 25. The extension of unemployme
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Chapter 5 Measuring Total Output: G
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5. Leisure. Leisure time is by defi
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The U.S. is a high per capita GDP c
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Example 17: In “An International
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The simple circular flow diagram be
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___ 3. Which of the following would
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2. Explain what nonproduction trans
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Chapter 6 The Aggregate Market The
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Example 2C: Assume the same facts a
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Example 5B: The price of crude oil
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Price Level Real GDP SRAS AD 2 AD 1
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Appendix: Why the Aggregate Demand
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___ 3. DEF Company can invest in ne
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2. List and explain the two factors
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Chapter 7 Classical Economic Theory
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Notice that the investment demand c
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Long-Run Equilibrium If Real GDP is
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Example 6B: When the economy is in
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Laissez-faire If the economy is sel
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___ 5. According to Say’s Law: a.
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3. On the graph below, draw an aggr
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Chapter 8 Keynesian Economic Theory
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Example 2B: The graph below illustr
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Example 5: Assume that the table be
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Notice on the graph on the previous
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According to Keynesian theory, a ch
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“The General Theory” also inclu
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___ 8. If the consumption function
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3. If the MPC is .667, and investme
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Chapter 9 Fiscal Policy The basic e
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Keynesian Fiscal Policy Theory and
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Example 5A: The federal government
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The Laffer Curve What will happen t
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Appendix: The Importance of Incenti
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___ 4. A decrease in government exp
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2. Explain what automatic stabilize
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Chapter 10 Money, Money Creation, a
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Example 4B: The castaways on Gillig
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Looking at the balance sheet below,
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Demand-side One-shot Inflation Exam
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4. Inflation increases uncertainty
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life; it came into existence not by
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calculated by using the potential d
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___ 12. If the required-reserve rat
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4. Referring to the balance sheet f
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Chapter 11 The Federal Reserve Syst
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5. After Bank X sells the $300,000
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Low Mortgage Interest Rates Mortgag
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Relaxed Standards for Mortgage Loan
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The Bursting of the Housing Bubble
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On February 17, 2009, the federal g
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Fed policies caused short-term inte
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___ 10. The Fed’s most important
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___ 25. In response to the recessio
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Chapter 12 Monetary Policy The basi
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2. A change in aggregate demand (AD
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Monetarist Transmission Mechanism C
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3. Borrowers do not have to seek ou
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Appendix: Book Review - “The Age
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Questions for Chapter 12 Fill-in-th
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___ 16. The primary source of incom
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7. According to Alan Greenspan, wha
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Chapter 13 Taxes, Deficits, and the
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Example 5: In 2015, Taxpayer A had
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of $5 and a quantity of 10 units. T
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The complexity of the tax law also
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the current government spending and
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cut of 1964. The top rate was lower
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___ 6. Federal excise taxes: a. are
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3. How would eliminating the loopho
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Chapter 14 Economic Growth The basi
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2. Labor. Labor can contribute to e
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estricting international trade (e.g
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An improvement in technology (e.g.
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The table below shows the economic
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will increase both Real GDP and per
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___ 8. Which of the following is co
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___ 26. The opinion that economic g
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Chapter 15 Less Developed Countries
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Example 8: Countries A, B, C, and D
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Obstacles to Economic Development f
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c. Restrictions on international tr
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Appendix: Book Review - “The Powe
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Page 257 and 258: Study Guide for Chapter 15 Chapter
Page 259 and 260: ___ 13. Among the counterproductive
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Page 263 and 264: Chapter 16 International Trade The
Page 265 and 266: Other Benefits of Free Internationa
Page 267 and 268: Example 6: The graph below illustra
Page 269 and 270: competitive disadvantage. But dumpi
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Page 277 and 278: ___ 18. Frédéric Bastiat’s “P
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Page 281 and 282: Chapter 17 Elasticity We are often
Page 283 and 284: Example 4A: What is price elasticit
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Page 287 and 288: Example 10A: When the price of Good
Page 289 and 290: Example 13B: On the graph below, su
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Page 299 and 300: Chapter 18 Utility The basic econom
Page 301 and 302: Nonetheless, society generally assu
Page 303 and 304: Example 9: Capital City operates a
Page 305: Marginal rate of substitution - the
Page 309 and 310: Complete the table below to answer
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Page 313 and 314: Chapter 19 The Firm The basic econo
Page 315 and 316: than contributing to team productio
Page 317 and 318: 1. Difficulty in raising large amou
Page 319 and 320: Corporations also use self-financin
Page 321 and 322: Example 24: A blacksmith who produc
Page 323 and 324: For financing needs, proprietorship
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Page 329 and 330: Chapter 20 Production and Costs The
Page 331 and 332: In Example 5B, Birdwell finds that
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Page 335 and 336: Quantity TC MC AFC AVC ATC 0 240 X
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Page 339 and 340: average total cost. Average fixed c
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Page 345 and 346: Chapter 21 Perfect Competition The
Page 347 and 348: Even though a perfect competitor ca
Page 349 and 350: Example 6C: This example builds on
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Page 353 and 354: Appendix: Perfect Competition in th
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___ 17. Perfect competition: a. req
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Answers for Chapter 21 Fill-in-the-
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Chapter 22 Monopoly Of the four mar
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3. Exclusive ownership of an essent
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maximizing quantity (4 units) creat
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$22 - 20 - 18 - 16 - 14 - Deadweigh
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2. Negotiating, beginning at a high
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Legal barriers are created by gover
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___ 8. The slope of the demand curv
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Price Quantity 3. List some of the
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Chapter 23 Monopolistic Competition
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For Percomp (the perfect competitor
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Example 7A: The graph below represe
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Example 9: The Organization of the
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Example 12 illustrates the dilemma
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its current price and quantity. The
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___ 14. Game theory: a. is a method
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Answers for Chapter 23 Fill-in-the-
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Chapter 24 Factor Markets The basic
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$ $240 - 200 - 160 - 120 - 80 - 40
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Since producers will attempt to equ
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2. Differences in nonmoney aspects
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were his strikeouts, walks, and hom
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___ 3. To maximize profits, a produ
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___ 19. According to the book, “M
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Multiple Choice: 1. a. 8. c. 15. d.
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Chapter 25 Labor Unions The primary
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The elasticity of demand for union
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Example 4A: Assume that the graph b
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Notice from the graph in Example 6
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Wage Factory A Quantity of Labor S
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As a cartel, a labor union faces a
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___ 10. For a monopsony: a. there i
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3. The graph below represents a lab
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Chapter 26 Interest, Present Value,
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An increase in expected rates of re
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An asset is valuable because we exp
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Example 13B: General Ordnance prove
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Appendix: Present Value Table One f
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___ 4. An increase in expected rate
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Problems: 1. List and explain the t
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Chapter 27 Market Failure The basic
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External Benefit If a market genera
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Example 2: To encourage the consump
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$100 - 90 - 80 - MSC 70 - $ 60 - 50
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A common good is nonexcludable. Non
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Study Guide for Chapter 27 Chapter
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___ 5. What government policy would
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4. Based on the information on the
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Chapter 28 Public Choice and Govern
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Candidates and the Median Voter Mod
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Example 8: According to State and F
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Example 10: When Elvis Presley was
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4. Pessimistic bias. This is the te
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___ 5. An elected official will: a.
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2. If a certain policy will yield s
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Chapter 29 Government Regulation of
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underproduction is the amount that
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micromanagement results in business
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market. They may agree with their c
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Questions for Chapter 29 Fill-in-th
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___ 10. The public interest theory
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4. List the four types of costs imp
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Chapter 30 Agriculture and Health C
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weather may cause bumper crops. Bad
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Security and Rural Investment Act o
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Example 12: From 1960 to 2013, the
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1. NHI would provide universal heal
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d. Insurance providers are not allo
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Study Guide for Chapter 30 Chapter
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Answer questions 7. through 10. by
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___ 21. If there were no individual
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Chapter 31 Income Distribution and
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Income is more equally distributed
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over a typical career is the accumu
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Ideal Income Redistribution The ide
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Poverty - a family whose income fal
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Appendix: Income Inequality around
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How is this story an analogy for th
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___ 2. In 2013, the Lowest Income 6
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Problems: 1. Explain the two primar
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Absolute advantage - when one natio
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Fiat money - money by government de
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Nonrivalrous good - a good for whic
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Absolute advantage, 16-9 Absolute e
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“Company town”, 25-6 Comparativ
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Eli Lilly and Company, 22-1 Emergen
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Houston, Texas, 15-10 Human capital
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Market, 3-1, 3-8-9 Market basket, 4
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Political bias, 9-4, 12-7 Political
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Short run production, 20-2-3 Short-
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Upturns, 9-4 USDA, 27-9, 30-1-2, 30
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Holt 7525-9 S15_IT

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