Suppose a family purchases 10,000 gallons of water a year at 20 cents a gallon and one diamond ring at a price of $1,000. Can we conclude that the diamond ring provides more utility to the family than water? Explain
What will be an ideal response?
No. In fact, the water provides more total utility than the diamond. We know that the (MU of the last gallon of water)/($0.20 ) = (MU of the ring)/($1,000). This implies the MU of the ring is 5,000 times more than the MU of the last gallon of water. Further, the total utility of the ring equals marginal utility since only one ring was purchased. Given the law of diminishing marginal utility, the total utility must be more than 10,000 times greater than the marginal utility of the 10,000th gallon, so the total utility for the water must be greater than the total utility of the diamond.
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A pharmaceutical company faces a price regulation where it cannot charge any higher than $5,000 for a lifesaving drug. The company knows that the patients put a high value on this product and are willing to pay up to $10,000 for it. The company decides to sell the drug at $5,000 but requires the patients to purchase periodic blood testing from them for $5,000 . This is an example of
a. Tying b. Bundling c. Fraud, the company is not allowed to sell for any higher than the regulatory price d. Both A&B
Out-of-pocket expenses such as wages and raw materials are
A. implicit costs. B. explicit costs. C. direct costs. D. an owner-provided capital cost.