Explore BrainMass
Share

# consumption theory

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

Would there be any differences in the set of variables used in a regression model of the demand for consumer durables (e.g., automobiles, appliances, furniture) and a regression model of the demand for "fast-moving consumer goods" (e.g., food, beverages, personal care products)?

Think about the factors that influence your decision when you go to Walmart to buy shampoo versus the factors that influence your decision when you go to the car dealership to purchase a car. For example, does your future earning power come into play when you are deciding between two different types of shaving creams? How about when you are deciding between a Lexus or a Toyota?

Again, use economic theory to back up your answer. What is the point of a regression and why do the dependent variables matter so much when developing the regression model.]

https://brainmass.com/economics/econometric-models/consumption-theory-77674

#### Solution Preview

You would likely want to include some different variables in a regression model of demand for consumer durables and non-durables. Recall the types of variables that are typically included in a demand equation (the price of the good, income, tastes, prices of related goods, and future expectations about all those things). While these things certainly play a role in demand for most all goods, when we talk about durable vs. non-durable goods some variables will affect one demand function more than another.

In the question above you are asked about non-durables such as food, beverages, and personal care product. What are some characteristics of these types of goods. Probably most important is that the prices per unit tends to be lower relative to most durable goods. This means that a lower % of income is spent on them. So, while people may generate a range of incomes and those incomes may fluctuate with business cycles, even those with low levels of income will ...

#### Solution Summary

This post illustrates consumption theory.

\$2.19

## The Rational Consumer

1. To say that you can't have too much of a good thing means that for any good that you enjoy (say pizza),
a. higher consumption will always lead to greater utility
b. higher consumption will cause utility to increase at an increasing rate
c. higher consumption will increase utility but only up to a point; after that utility will start to decrease
d. it is valid to measure utility in utils
2. Which of the following goods is most likely to display increasing marginal utility over some range?
a. chicken during the 1920s, when it was considered a luxury good
b. paint, which you need in an amount sufficient to paint at least one entire room
c. lobsters, which are so expensive that you must eat two to get your money's worth
d. all of the above
3. The principle of diminishing marginal utility means that when Sarah eats pizza, her satisfaction from the second slice of pizza is probably
a. greater than that from the first
b. equal to that from the first
c. less than that from the first
d. not comparable to that from the first
4. James finds a new job that doubles his income. He adjusts his consumption. From this we know that for every normal good James buys
a. James's marginal utility per dollar will rise
b. James's marginal utility per dollar will fall
c. James's marginal utility per dollar will stay constant
d. James's total utility will fall
5. You go to an "all-you-can-eat" buffet. If you maximize utility, the marginal utility of the last bite that you eat will be
a. equal to the price of the buffet
b. as high as possible
c. zero
d. dependent on how much you like the buffet
6. Suzy knows she has maximized her utility, because she is on her budget constraint and
a. consumption of good X equals consumption of good Y
b. what is spent on good X equals what is spent on good Y
c. MUx/Px = MUy/Py
d. MUx = MUy
7. Benny spends all his money buying wine and cheese. The marginal utility of the last bottle of wine is 60, and the marginal utility of the last block of cheese is 30. The price of wine is \$3, and the price of cheese is \$2. Benny
a. is buying wine and cheese in the utility-maximizing amounts
b. should buy more wine and less cheese
c. should buy more cheese and less wine
d. is spending too much money on wine and cheese

8. At the optimal consumption bundle
a. the marginal utility of all goods consumed is equal
b. the marginal utility per dollar spent is equal for all goods consumed
c. the price of all goods consumed is equal
d. none of the above are true
9. The market demand curve
a. is the horizontal summation of the individual demand curve of all consumers
b. is the vertical summation of the individual demand curve of all consumers
c. cannot be derived from the individual demand curve of all consumers
d. has no relation to individual demand
10. The income effect of a price change is the effect on the consumption of a good
a. due to a change in income when all prices change in the same proportion
b. due to a change in purchasing power caused by a change in the price of the good
c. due to a change in income caused by a change in the price of labor
d. due to a change in income sufficient to offset the effect of a price change

View Full Posting Details