Which one(s) is(are) true? Explain why others are false.
1) People do less of what they want to do as the cost of doing it rises.
2) Marginal utility increases as quantity increases.
3) Real price is the price you see on a good in a store.
4) When the price of a good goes up, substitutes for that good are relatively less attractive.
The correct answer and explanation is:
The correct answer is 1): “People do less of what they want to do as the cost of doing it rises.”
Explanation:
- True: The law of demand states that as the price of a good or service increases, the quantity demanded typically decreases, assuming all other factors remain constant. This is because as the cost of something rises, people are less likely to purchase or engage with it. The higher cost reduces the incentive to consume or participate in the activity, leading to a decrease in demand.
- False: Marginal utility decreases as quantity increases, not the other way around. This concept is known as the law of diminishing marginal utility. It states that as more units of a good or service are consumed, the additional satisfaction (utility) gained from consuming each additional unit tends to decrease. For example, the first slice of pizza you eat provides a lot of satisfaction, but by the fifth or sixth slice, the added satisfaction diminishes.
- False: The real price refers to the price of a good adjusted for inflation, meaning it reflects the true cost in terms of purchasing power. The nominal price is the price you see on a good in a store without any adjustments for inflation. The real price accounts for changes in the value of money over time, while the nominal price is the sticker price.
- False: When the price of a good rises, substitutes for that good generally become more attractive. This is a basic principle of economics. If the price of a product increases, consumers may look for similar but cheaper alternatives. For example, if the price of coffee rises significantly, people may switch to tea or other beverages as substitutes. Therefore, substitutes become relatively more attractive when the price of a good increases.