Eco101

Quiz 2
Chapter 3

Total utility: refers to consumer ranking of different goods and services.

Benefits, pleasure or satisfaction which consumers obtain from goods and
services they consume.
Total utility: the full satisfaction resulting from the consumption of that
product by a consumer.
The total satisfaction derived from the consumption of goods or services
EX: total utility of consuming seven Cokes per week is the total
satisfaction that those seven Cokes provide.
Marginal utility: is change in satisfaction resulting from consuming a
little more of that product.
The expression marginal is a key term in economics and always means
additional or extra.
Marginal utility denotes the additional utility you get from the
consumption of an additional unit of a commodity.
EX: marginal utility of seven coke consumed is the additional satisfaction
provided by the consumption of that coke.
So the marginal utility is the difference in total utility gained by
consuming six cokes per week and by consuming seven cokes per week.

Law of diminishing marginal utility: the utility that any consumer

derives from successive units of a particular product diminishes as total
consumption of the product increases.
It states that as the amount of good consumed increases, the marginal
utility of that good tends to diminish.
How to maximize utility:
MUgood1/P1 = MUgood2/P2
=MUgood3/P3 = =MU per $ of income (page 86)
The Indifference Curve: shows the different combination of two
commodities that we can consume.

Question (2-3) Page101

a- Fill in the figures for marginal utility
b- Draw a graph of the figures for total and marginal utility (you will
find the example of the graph in the Doctors slides)
c- Assume that Katie now falls for a guy who also likes going to the
cinema. As a result her marginal utility for each visit doubles.
What is her total utility now for 3,6,7 visits?

Visits 1 2 3 4 5 6 7 8
TU 12 20 25 28 30 31 31 29
MU - 8 5 3 2 1 0 -2
Mux2 - 16 10 6 4 2 0 -4
TUnew 12 28 38 44 48 50 50 46

3 visits ? = 38
6 visits ? = 50
7 visits ? = 50
 Chapter 4
(Dr.Zainab)

Profits and Costs: the theory of the firm is based on the assumption that
firms maximize profits (cost minimize)
Factors of Production:
Land: all gift of nature, such as land and raw materials are considered
land
Labor: all physical and mental contributions that are provided by people
Capital: all manufactured aids to further production, such as machines,
are referred to as capital
The meaning of cost:
Profit: are the difference between the value of the goods that a firm sells
and the costs of producing those goods.
Cost: is the value of the inputs used to produce its output.
Economic Profits (pure profits):
The difference between the revenue received by the firm from the sale of
output and the opportunity cost of all the inputs used to make the output.
(if costs are greater than revenues, such negative profits are called
losses).
The short run: is a time period in which the quantity of some input,
called fixed factors cannot be increased.
The long run: is a time period in which all inputs may be varied but in
which the basic technology of production cannot be changed.
The very long run: is length of time over which all of the firms factors
of production and its technology are variables.
The production function: describes the precise physical relationship
between factor inputs and outputs.
Total Cost: represents the lowest total dollar expense needed to produce
each level of output q. TC rises as q rises.
TC= FC+VC
Fixed Cost: the total dollar expense that is paid out even when no output
is produced; fixed cost is unaffected by any variation in the quantity of
output.
FC= TC-VC
Variable Cost: expenses that vary with the level of output-such as raw
materials, wages, and fuel- and includes all costs that are not fixed.
VC= TC-FC
Marginal Cost: denotes the extra or additional cost of producing 1 extra
unit of output.