Why would an ounce of gold be priced higher than an ounce of coffee beans, even though coffee is generally considered more essential than gold? Explain the paradox in terms of marginal and total utility.

Why would an ounce of gold be priced higher than an ounce of coffee beans, even though coffee is generally considered more essential than gold? Explain the paradox in terms of marginal and total utility.

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter10: Consumer Choice Theory

Section: Chapter Questions

Problem 3P

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Question

Why would an ounce of gold be priced higher than an ounce of coffee beans, even though coffee is generally
considered more essential than gold? Explain the paradox in terms of marginal and total utility.

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Step 1: Understanding Marginal Utility

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Step 2: Gold's Marginal Utility

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Step 3: Coffee's Marginal Utility

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Step 4: Total Utility of Gold

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Step 5: Total Utility of Coffee

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Step 6: Price Determination

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The following table shows the amounts of additional satisfaction (marginal utility) that Ross would get from consuming successive quantities of products A and B. Fill in the MU/P column for each product. Instructions: Enter your answers rounded to one decimal place. Units of Good A 1 2 3 4 5 6 7 Price of Good A = $6 MU of Good A, utils 72 66 60 54 48 42 36 MU/P for A Units of Good B 1 2 3 4 5 6 7 Price of Good B = $4 MU of Good B, utils 48 42 36 30 24 20 12 MU/P for B If Ross has an income of $64, how many units of each will he purchase to maximize his utility? Instructions: Enter your answers as a whole number. units of good A units of good B
Suppose Susan has to choose between purchasing high-definition televisions and milk. Which of the following is the utility-maximizing rule that Susan should follow while choosing the optimal quantities of these two goods? (Note: In the answer options that follow, MU stands for "marginal utility.") O MU of Milk = MU of HDTVS O (MU of Milk) × (Price of Milk) = (MU of HDTVS) × (Price of HDTVS) MU of Milk MU of HDTVS Price of HDTVS Price of Milk MU of Milk MU of HDTVS Price of Milk Price of HDTVS Since milk costs little and high-definition televisions are expensive, it must follow that when people choose their optimal quantities of milk and high- definition televisions to purchase, the marginal utility they receive from the last high-definition television they buy is v than the marginal utility they receive from the last gallon of milk they buy.
Illustrate with Example: According to law of diminishing marginal utility, as you consume more and more units of a commodity, total utility would go on increasing, but at a diminishing rate.