A consumer allocates his budget according to rules of utility maximization
What are the rules of utility maximization and how do they explain the paradox of value, which is that diamonds are expensive but useless, while water is inexpensive but essential?
The rules of utility maximization are to allocate the entire available budget and consume the combination of goods and services that make the marginal utility per dollar equal for all goods and services. Equating the marginal utility per dollar is what explains the paradox of value. People consume a great deal of water. Because they consume a lot of water, the marginal utility of water is quite low. However, people have only a few diamonds. Hence the marginal utility of a diamond is quite high. Thus for the marginal utility per dollar of water to equal that of diamonds requires that the price of water be low and the price of diamonds high. Note, however, that this condition says nothing about the total utility from water or the total utility from diamonds. Because water is essential to life, its total utility is tremendous. Because diamonds are not essential, their total utility is much smaller.
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In the table above, which of the following is TRUE?
A) Jim and Sally have increasing marginal utility. B) Jim has increasing marginal utility and Sally has diminishing marginal utility. C) Jim has diminishing marginal utility and Sally has increasing marginal utility. D) Jim and Sally have diminishing marginal utility.
Assume that the expectation of a recession next year causes business investments and household consumption to fall, as well as the financing to support it. If the nation has low mobility international capital markets and a fixed exchange rate system, what happens to the current international transactions balance and the monetary base in the context of the Three-Sector-Model? a. The current
international transactions balance becomes more positive (or less negative) and monetary base rises. b. The current international transactions balance becomes more negative (or less positive) and monetary base falls. c. The current international transactions balance becomes more positive (or less negative) and monetary base falls. d. The current international transactions balance and monetary base remain the same. e. There is not enough information to determine what happens to these two macroeconomic variables.