True or False please provide an explanation of the answer

 

1. In fact, marginal utility approach explains the law of demand. That is the price and the quantity demanded is inversely related. Substitution effect: as the price of a good falls, consumers substitute now more for that good and less for the other good. (True or False)
2. Price in units of utility increases as the consumer is only willing to pay less for the additionally less satisfying consumption. (True or False)
3. The extra utility a consumer obtains from the consumption of 1 additional unit of a good or service; equal to the change in total utility divided by the change in the quantity consumed. (True or False)
4. Optimum combination means a lower price increases the purchasing power of money income. Thus, enabling a consumer to buy more of a product at a lower price. (True or False)
5. A change in either product prices or money income moves the budget line. (True or False)
6. Total Utility increases to a maximum point as the marginal utility declines to zero. And then it becomes negative. (True or False)
7. Changing the price of one product shifts the budget line and determines a new equilibrium point. (True or False)
8. Income effect means that lower prices give an incentive to substitute that lower priced good for another relatively high price good. (True or False)

 

1. TRUE - Because marginal utility diminishes as the quantity of a good is consumed increases( the law of diminishing marginal utility), consumers are willing and able to pay lower prices for larger quantities (the law of demand). Hence the law of demand exists because the less satisfaction is received for larger quantities. Substitution effect arises when consumers switch to cheaper alternatives.
2. FALSE- The price a consumer is willing to pay for a good depends on his marginal utility, which declines with each additional unit of consumption, according to the law of diminishing marginal utility.
3. TRUE - Marginal utility which is the extra utility a consumer obtains from the consumption of 1 additional unit of a good or service is given by the change in total utility divided by the change in quantity consumed.
4. FALSE - Optimum combination of goods is at the point where the budget line is tangent to an indifference curve or where the marginal rate of substitution is equal to the opportunity cost or relative price of the two goods.
5. TRUE - The budget line will shift when there is;

• a change in the prices of one or both products with nominal income remaining the same. or,
• a change in the nominal income with relative prices of the two products remaining the same.

6.FALSE - Total utility declines when marginal utility becomes negative.

7.TRUE - Changing the price of one product with nominal income remaining the same causes a shift in the budget line, hence new equilibrium is attained.

8.FALSE - Income effect is the change in demand for a good or service caused by a change in a consumer's purchasing power resulting from a change in real income.