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In: Economics

2. Why is it that the consumer can maximize total net utility only if the purchase...

2. Why is it that the consumer can maximize total net utility only if the purchase quantity brings marginal utility as close as possible to equality with price?

3. Use the law of diminishing marginal utility to explain why Domino's and Pizza Hut allow the purchase of a second pizza for only $5 when one pays full price (around $10) for the first pizza. Why not simply charge $7 a pizza instead?

  1. Explain why the long-run average cost is typically U-shaped. Explain the connection between the shape of long-run average cost curve and returns to scale.

  

  1. "Assuming the long-run average cost curve is U-shaped, a firm will always seek to operate at the lowest point on the long-run average cost curve." True or false? Explain your answer.
  1. Why is the total profit curve shaped like a hill? Is it a good thing to go to a point where marginal profit is zero? Explain. What is the value of marginal profit at the profit-maximizing output?

Expert Answer

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Expert Solution

2) From the law of diminishing marginal returns, we know that the utility obtained from each extra unit of the good consumed decreases. This means that the marginal utility from a unit of good keeps decreasing as we consume more and more units of a good. So, for the initial units the marginal utility is quite high, but as we start consuming more units, the marginal utility starts falling. We know, that the net utility is the difference between the utility obtained and the price of the good. So, a consumer would maximise his/ her utility till the time the marginal utility will be greater than the price of the good. If he chooses to consume beyond that quantity, his net utility will start decreasing because the marginal utility obtained from the further units will be less than the price of each unit of the good. This is why, we can say that the net utility is maximum when the marginal utility is as close as possible to the price of that good.

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Rahul Sunny answered 2 years ago
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