1. Using the law of diminishing marginal utility, briefly explain why it is often suggested not to go shopping for groceries when you are hungry. How might hunger influence your purchasing decisions and the perceived value of food items? (4 points)
2. A nation has a fixed amount of arable land that can be used to grow either staple crops to ensure food security or cash crops for export to generate foreign exchange. Policymakers decide to prioritize staple crops. What is the opportunity cost of this decision? (3 points)
3. The law of demand states that price and quantity demanded of a good are inversely related. Explain how the law of diminishing marginal utility helps to explain this relationship. In your answer, provide an example to illustrate your point. (3 points)
4. The law of supply states that price and quantity supplied of a good are directly related. Explain how the principle of increasing opportunity cost supports this relationship. In your answer, provide an example to illustrate your explanation. (3 points)
5. Construct a correctly labeled graph of supply and demand, based schedule below and answer questions 1-5. (2 points each)
Price of good x Quantity Demanded of good x Quantity Supplied of good x
$4 1,400 0
$6 1,200 150
$8 1,000 300
$10 800 450
$12 600 600
$14 400 750
1. At what price will you find no shortage, nor surplus?
2. Identify any price that would result in a surplus of good x.
3. How would a decrease in demand affect the equilibrium price and equilibrium quantity?
4. How would an increase in supply affect the equilibrium price and equilibrium quantity?
2. Opportunity Cost of Prioritizing Staple Crops:
The opportunity cost of prioritizing staple crops is the forgone production of cash crops. By choosing to use the land for staple crops, the nation gives up the potential revenue and foreign exchange that could have been earned from exporting cash crops. This lost revenue could have been used for other important national needs like infrastructure development, education, or healthcare.
3. Diminishing Marginal Utility and the Law of Demand:
The law of diminishing marginal utility helps explain the inverse relationship between price and quantity demanded.As the price of a good decreases, consumers are willing to buy more of it. This is because, at a lower price, the marginal utility of each additional unit purchased is now higher relative to its cost.
Example: Imagine you love pizza. If a single slice costs $5, you might buy one or two. If the price drops to $2 a slice, the marginal utility of each additional slice (while still diminishing) becomes more appealing relative to the lower cost. You are more likely to buy several slices. At a lower price, the extra satisfaction from each additional slice is worth the lower cost, so the quantity you demand increases.
4. Increasing Opportunity Cost and the Law of Supply:
The principle of increasing opportunity cost states that as you produce more of one good, the opportunity cost of producing even more of that good increases.This principle supports the law of supply (the direct relationship between price and quantity supplied). As the price of a good increases, producers are willing to supply more. This is because the higher price covers the increasing opportunity cost of producing more.
Example: A farmer can grow wheat or corn. If the price of wheat increases, the farmer will be incentivized to shift resources (land, labor, capital) from corn production to wheat production. Initially, shifting resources might be relatively easy and inexpensive. However, as the farmer continues to specialize in wheat, the opportunity cost of shifting even more resources from corn (which they are now growing less of) becomes higher. They might need to invest in specialized equipment or hire additional labor, increasing the cost of producing each additional unit of wheat. Only a higher price would justify these higher costs and incentivize the farmer to supply more wheat.
5. Supply and Demand Graph and Questions:
Here's the graph and answers to your questions:
Price
|
| S
| /
| /
| /-------- Equilibrium
| / /
|/______/_________________ Quantity
| D
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Equilibrium Price: $12 (where supply and demand intersect)
Surplus Price: Any price above $12 (e.g., $14). At these prices, quantity supplied is greater than quantity demanded.
Decrease in Demand:A decrease in demand (a shift of the demand curve to the left) would lead to a lower equilibrium price and a lower equilibrium quantity.
Increase in Supply:An increase in supply (a shift of the supply curve to the right) would lead to a lower equilibrium price and a higher equilibrium quantity
1. Diminishing Marginal Utility and Grocery Shopping While Hungry:
The law of diminishing marginal utility states that as a person consumes more of a good, the additional satisfaction (marginal utility) derived from each extra unit decreases. When you're hungry, the first few bites of any food provide immense satisfaction. However, as you continue eating, the satisfaction from each additional bite decreases. When grocery shopping hungry, this heightened initial satisfaction with any food item makes you perceive its value as much higher than it actually is. Everything looks delicious and appealing because your body is craving sustenance. This inflated perception of value leads you to buy more than you need, as each item seems incredibly desirable in your hungry state. You're maximizing short-term gratification (satisfying immediate hunger) over long-term planning (budgeting and avoiding food waste).