1. What is the principle of Diminishing Marginal Utility?

Explain how it acts as an equilibrating mechanism in the

study of consumer behavior.

 According to the law of diminishing marginal utility, as a person consumes more of one good, the added
satisfaction (marginal utility) they get from it continually decreases. As consumers consume a good, the less
benefit per unit they derive from it until it no longer contributes to their satisfaction, and actually takes away from it.
 Assuming that the consumer exercises rational choice, faces prices and income, given his tastes and
preferences, and that he derives satisfaction from certain combinations of goods and services, the law functions as
an equilibriating mechanism in that it illustrates how an excess of total utility lessens marginal utility, being that
the goal is to reach maixmum utility, or the best possible consumption combination to price for all goods.
Utility is maximized when the last dollar spent for each commodity bought gives the same increase in
satisfaction.

2. Consider the demand for oatmeal expressed in this quotation: ‘We always buy Quaker Oats now. I don’t even
have sugary cereals in the house. In the beginning it was the price, now I don’t even consider that. We have
become very sugar conscious in our family’. Interpret this in terms of determination of demand and elasticity of
demand for oatmeal and for sugary cereals

 Ignoring the ceteris paribus assumption, factors affecting demand include change in consumer income, change in
other goods’ prices and change in consumer tastes. The quote shows that the determinant for the lowering of demand
for sugary cereals was initially due to price, and in line with the decrease in demand for sugary cereals, was the
increase in demand for Quaker Oats later due to consumers taste.
 Since the availability of close substitutes influences elasticity, Quaker Oats, being substituted for sugary cereals
shows an elastic demand for sugary cereals, with quantity demanded responding greatly to price changes, or having a
greater sensitivity to price changes.

3. Discuss technological advances in relation to costs, the types of returns to scale and the Production Possibility
Frontier for the economy as a whole.

 The PPF is a graph that shows the combinations of output that the economy can possibly produce given the available
factors of production and the available production technology. Given that resources are scarce and with the existing
capital technology and labor, only so much can be produced. Through technological advancements, more efficient
production techniques are realized, and the production curve moves toward the right side even with the scarce
resources, to a point which previously would have been impossible or unattainable. With an increasing return
to scale, the change in input leads to a more than proportional output, due to the presence of technological
advancement. In line with the 1st principle of economics, the trade-off lies in that the total cost increases to upgrade
the technology, at the price of less input per increased output."

4. Explain the process of how producer equilibrium is achieved and the components used in determining such
equilibrium.

 Producer equilibrium is achieved at the point of tangency of the isocost and isoquant. The compoents used in
determining producer equilibrium are the isoquant curve—convex due to the law of diminishing marginal rate of
substitution— consisting of combinations of labor and capital producing same amount of output, and the isocost
line, containing the locus of points showing the combination of inputs that can be purchased with the available budget.
 Represented by point E, the point of tangency is the combination of (L,K)— where L denotes labor, and K denotes
capital—is chosen by the firm because it is the highest attainable isoquant for a given level of of the firm’s
budget constraints.

5. You are the product manager of Hapee Toothpaste and are considering increasing its selling price with the given
view of increasing profits. Use your knowledge of all types of elasticities in your analysis in coming up with that
decision (You can make your own assumptions in analyzing)

Basic necessities like food are usually inelastic, and those that are not necessities are usually elastic. Everyday toiletries
such as toothpaste are necessities, normally considered inelastic in demand, however we must consider that availability
of substitutes influences elasticity when we consider increasing selling price. Hapee Toothpaste is only one of the
many brands in the market, and the specific brand of Hapee toothpaste is elastic.
Moreso, the effect of the price increase for elastic products decreases total revenue.
 Illustration:
A consumer would buy 8 hapee toothpastes for 50 pesos but only 4 pieces when priced at 65 pesos, because a 1%
change in price will have lead to to a 2.56% change in quantity demanded—elastic.

Should the price increase from 50 to 65 pesos), revenues would (from 400 to 260 pesos), due to consumers patronizing
cheaper substitutes/alteratives. Being the product manager and knowing all of this, the better decision not to increase
price, rather to keep the current price, or even lower it.

6. The Department of Agriculture predicted bumper crops of corn and wheat. But the Chief Economist warned
consumers not to expect prices to decrease since the costs of production were rising and foreign demand for the
crops was increasing. ‘The classic pattern of supply and demand won’t work this time’, he said. Discuss this
observation

The chief economist is right in this situation because the classic pattern of supply (price and quantity are positively
related) and demand (price and quantity are inversely related) doesn’t apply due to the rising foreign demand. Following
the pattern, the corn and wheat surplus would naturally lead to a price decrease, to cater to local demand, however the
pattern is disrupted by foreign demand, that wont warrant a decrease in price to compensate for the extra supply,
because the surplus can be sold at cost, or even higher to address the foreign demand.

7. Why is a firm’s Marginal Cost Curve also its Supply Curve? Why is a consumer’s Marginal Utility Curve also its
Demand Curve? Start your explanation from the Total Cost and Total Utility Curves. Show the graphs.

“The overall cost a firm has to produce a good, which includes variable and fixed costs is represented in the Total
Cost and Utility graphs. A firm’s Marginal Cost (MC) Curve is also its Supply Curve, because the MC curve of a firm
shows ratio of change in total cost to quantity supplied. The MC graph shows the value of MC as quantity increases.

In line with this, the Marginal Utility (MU) Curve represents the extra satisfaction consumers get from consuming an
additional unit of a good. The MU curve is a consumer’s demand curve in that it shows the amount a consumer is
willing to pay for a good and the quantity he demands at any point.

8. Suppose all firms in a monopolistically competitive industry were merged into one large firm. Would that new
firm produce as many different brands? would it produce only a single brand? Explain.

Monopolistic competition is essentially of monopoly and perfect competition blended together. That being said,
Monopolistic competition is characterized large number of sellers, and free entry into the market, with the monopolistically
competitive firm’s product being slightly differentiated from the others, (due to different physical characteristics or
perceived difference through marketing & advertising) that allows it to have some control over price, but not too
much.

Ex. Toothbrush industry is a monopolistically competitive industry—all toothbrushes (identical product), but certain
brands like Colgate differentiate their product with advertising and features such as rubber grip handles and 360 flex
bristles, and can command a higher price for it because of the extra benefits.

If all the firms in a monopolistically competitive industry (toothbrush) were to merge, the resulting firm wouldn’t produce
as many brands as it would have if the firms remained unmerged, because too much brand competition would be
 detrimental to the firm. Similarly, it would neither produce only a single brand because keeping the variety is
equally important, and allows for better market penetration. The resultant firm would simply produce a controlled
variety of brands, less than if the firms were unmerged, that still cater to different consumer’s needs at different price
points.

9. What are the pros and cons of Pigovian taxes and command and control policies? give at least 2 situations and
reasons where Pigovian taxes can be preferred over command and control policies; plus at least 2 situations and
reasons where command and control policies can be preferred over Pigovian taxes

 These taxes and policies prevent/are solutions to market failure—imbalance between products demanded and
products supplied..The pros of these methods of government intervention methods protect the consumers in order
for business to be fair, not letting the consumer be taken advantage of especially in cases of large corporations.
which is the imbalance in products demanded and products supplied, however its cons are in that consumers may
be taxed unfairly

1. Pigovian > CC
a. In cases where Pigovian taxes properly keep the big businesses in line,
 With Uber paying the latest LTFRB’s fine of 190M, the cost was substantial enough to make them
follow the government policies, but not enough for the government to have interrupted their efficient
service to the public completely
 A pigovian subsidy such as that on flu vaccine is also beneficial in that though it makes consumers
pay for the extra benefit, it spurs more production as well for societys benefit.
2. CC > Pigovian

 In cases of endangered wildlife preservation, such as illegal hunting, complete prohibition preferable to
preserve the ecological state. This is preferable to Pigovian taxation because given the lucrative nature of
selling rare animals and their hide on the market, companies would just pay the corresponding fines,
knowing that it would be worth their while—even at the detriment of exotic wildlife.

 Weapons of mass destruction (nuclear and chemical), even though there is a market for it, are not legal to
the public because its effects are unpredictable. Because of this, the common people would prefer its
prohibition over its legality but with penalization to prevent any major destruction. If the case was the latter,
those who are able and have access to them would choose to use them and eventually just be penalized