Question

Please help with these

1) How do economists model consumer satisfaction?

2) How do consumers optimize their purchasing decisions?

3) What is the diamond-water paradox?

4) Distinguish between total utility and marginal utility .

5) Explain why the law of diminishing returns takes place for all goods/services.

6) Explain the concept of consumer optimum.

Answer 1

1 How do economists model consumer satisfaction?

A Economist model Consumer satisfaction using the Concept of Indifference Curve. The Indifference Curve is the curve which gives various Combination of 2 goods that gives same level of satisfaction. IC is in good-good plane. See the figure below

oed X32 GoodXx

in the figure above at point A x is less and y is more but at point B X is more and Y is less since both A and B lie on the same IC they give same level of satisfaction. Any point on the right of IC will have more of both the good will therefore have higher level of satisfaction and that point will lie on higher IC.See the figure below.

2 How do consumer optimize their purchasing decision?

Consumer tries to maximize their utility given their budget constraints. In simpler words a consumer tries to choose those commodities which is affordable and gives the highest possible level of satisfaction. See the figure below.

in

a consumer would purchase that bundle of good where budget line (AB) is tangent to IC. Point C is affordable and gives highest possible level of satisfaction.

3 What is diamond water paradox?

Diamond water paradox is the concept which was first presented by Adam Smith. Though water is more valuable than diamond but still diamond is costlier than water. What is the reason behind it? Water is available in abundance therefore in terms of money the value of it is less. On the other hand resources of diamonds are less therefore it is costlier.

4. What is the difference between total utility and marginal utility?

Total Utility is the total utility that one derives by consuming n units. On the other hand Marginal Utility is the additional utility derived from consuming nth unit. for eg TU is the utility from consuming 4 units of a commodity and MU is that additional utility derived from consuming 4th commodity.