Why does gold, which is a relatively nonessential item, have a higher price than water, which is essential to life?
What will be an ideal response?
Gold has a high price and a high marginal utility, while water has a low price and a low marginal utility. Water is relatively abundant in supply, while gold is relatively scarce. Hence people consume a lot of water and only a little gold. As a result, the marginal utility of water is low and the marginal utility of gold is high. The utility maximizing rule, that the marginal utility per dollar on gold must equal that of water, in combination with the high marginal utility of gold and low marginal utility of water, implies that the price of gold must be higher than that of water.
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Market income is
A) profit earned in factor markets. B) interest earned in factor markets. C) wages, interest, rent, and profit earned in factor markets. D) wages, interest, rent, and profit earned in factor markets plus cash payments made to households by government.
When observing people making choices that do not at first appear to be rational, an economist will ask,
a. "How might a psychologist explain this behavior?" b. "Why do we economists keep believing that people behave rationally?" c. "How might such behavior be serving someone's purposes?" d. "What is wrong with these people?"