1. To increase marginal utility, you must decrease consumption (everything else
ID: 1092696 • Letter: 1
Question
1. To increase marginal utility, you must decrease consumption (everything else held constant). This statement is correct, even though it sounds strange. Explain why.
2. Suppose that the marginal utility of good A is 4 times the marginal utility of good B, but the price of good A is only 2 times the price of good B. Is this point consumer equilibrium? If not, what will occur?
3.What is the purpose of the two fields of study, neuroeconomics and behavioral economics? Why might people tend to be overconfident?
Explanation / Answer
1.
The statement is not so strange, since it's marginal utility which is increasing, not total utility. That is, a consumer always prefer more to less (as long as marginal utility is nonnegative), but she gets increasingly less utility from each additional unit of consumption. Marginal utility measures the utilty of that additional unit of consumption.
2.3
When you are looking at neurons you are looking at a biological basis. When you are looking at behavior you are looking at how we have learned to respond to our environment.
When you are looking at neuroeconomics you are looking at how people make economic decisions and make decisions regarding financial risks. When you are looking behavior economics looks at how the environment effects the finacial decisions that we make such as social influences and emotions. In essence behavioral economics looks at how external forces effects financial decisions while neuroeconomics looks at the process in which we analyse the risk and make the financial decisions.
The standard model of economics is purely theoretical. That is, it deals with mathematical models built on assumptions. Empirical economics tests those assumptions by testing predictions produced by the standard model against observations made in reality
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