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Economic Quiz

Subject: Consumer Behavior

Paper Model: APA

Paper Type: Research Paper

Total Words: 971

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Utility Maximization Rule

 


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The utility maximization rule states that consumers make decision to allocate their income in such a way that the least dollar spent on each of the product X and Y yields the same amount of utility. In other words, when all the income is spent, the consumption of two goods X and Y is maximized, when the marginal utility per dollar spent is same for goods X and Y.

The general formula which explains the utility maximizations in this way is given below:

MU of Product A/ Price of A = MU of product B/Price of B

In this situation, the marginal utility is equal for the  per dollars spent on each good X and Y. Until, the point, one good say X will provide the more utility per dollar, consumer will keep buying, as more of the X is bought, MU decline/diminishes up to the point when the MU per dollar for X becomes equal to Y.

Q5. 

Total cost (TC) includes all the expenses incurred by the firm, which can be divided into two parts: variable and fixed costs. Thus, Total cost = variable cost (VC)+ Fixed cost (FC).  Average total cost is the total cost divided by the number of units produced by the firm. When the firm starts production, it incurs fixed cost, which remains same regardless of the number of units produced during the course of operation. ATC is u shaped because, it takes its shape from AVC which reflects the onset of diminishing returns to the variable factors. In other words, as we produce more, firm experiences economies of scale and ATC declines, but when its keeps on producing more, it begins to show diseconomies of scale and ATC rises upwards. In addition, when MC is below the ATC, it is falling, but when MC moves above the ATC, after crossing it, ATC starts to rise, which makes it U-shaped.


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Problem   A sale by business increases quantity sold. Higher marginal income taxes reduce work incentives.   Government should pass gun control.
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