Utility Theory. Determine whether each of the following statements is true or fa
ID: 1255209 • Letter: U
Question
Utility Theory. Determine whether each of the following statements is true or false. Explain why.a. According to the theory of consumer behavior, more is always better.
b. Consumers must understand how much one product is preferred over another in order to rank order consumption alternatives.
c. A market basket is a descriptive statement that relates satisfaction or well-being to the consumption of goods and services.
d. The nonsatiation principle abstracts from time and place considerations.
e. Marginal utility measures the consumer’s overall level of satisfaction derived from consumption activities.
Explanation / Answer
A. True. Consumer behavior theory rests upon the Amore is better@ assumption regarding the utility tied to consumption. All goods and services are desirable in the sense of being able to satisfy consumer wants. As a result, consumers will always prefer more to less of any good or service.
B. False. The consumers understanding of ordinal utility makes possible a rankordering of preferred goods and services. Notice that knowledge concerningcomplete consumer preferences does not necessarily include understanding abouthow much one product is preferred over another.
C. False. A utility function is a descriptive statement that relates satisfaction orwell-being to the consumption of goods and services.
D. True. At any specific place and time, consumers do become sated. Therefore, thenonsatiation principle involves a certain amount of abstraction from time and placeconsiderations. It is best considered within the context of money income where moremoney brings additional satisfaction or well-being.
E. False. Whereas total utility measures the consumer's overall level of satisfactionderived from consumption activities, marginal utility measures the added satisfactionderived from a one-unit increase in consumption of a particular good or service,holding consumption of other goods and services constant.
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