Utility Theory

Kaplan book P. 54

Question: Which of the following statements is least accurate with respect to utility theory ? Utility…

A. is an ordinal measure of a consumer’s level of satisfaction

B. theory demonstrates that quantity demanded decreases as price increases

C. theory assumes that consumers can consistently rank all possible combinations of goods


B. Utility theory is consistent with the existence of a Griffen good, one for which a price increase results in a decrease in consumption

To me, the answer just enforces that B is accurate. Can somebody further explain why this is not the case. If price increases, demand decreases seems to be the same as if price increases consumption decreases.

A and C are a direct assumptions/statements for utility. B is explanation of how utility theory helps explain downward slopping demand curve. So i would chose B

this is tricky and won’t be part of the exam…B relies on convex utility curves which is not necessarily part of utlility theory…(i don’t think so at least the last time i studied this stuff).

I think that the content of the answear is wrong. From what I know there is no such thing as a Griffen good. What they probably meant was a Giffen good, one where a price increase leads to an increase in quantity demanded. This would make B,

B. theory demonstrates that quantity demanded decreases as price increases

the least accurate statement.

Dont get too worked up about it. U-theory does not make a judgement that demand decreases with rising prices, with Giffen goods, higher prices apparently increase utility, as a result demand increases with price.

Like the restauranteur, who knows that to increase wine sales, they should raise the price a bit - because no man wants to be seen as buying the cheapest wine for his date.

Was it a typo in the first post that it was written as “Griffen good” as opposed to “Giffen good”? And that “one for which a price increase results in a decrease in consumption.” Because a Giffen good has the opposite… a price increase results in an INCREASE in consumption.

A Giffen good has to be an inferior good. An inferior good is where the substitution effect and income effect move in opposite directions. What makes an inferior good a Giffen good is that the income effect is stronger.

For example, the price of inferior good X increases, everything else remains constant. According to the substitution effect the individual should buy less. But as the price increased, the individual has less relative income. Since the good is inferior, more is consumed at lower income levels. As the income effect is stronger than the substitution effect, the individual ends up buying more with a price increase.

I don’t think the answear refers to veblen or credence goods But that would be a good answear too (I think).

Than again, I just remember this stuff from eco, haven’t even started level 1.

feels like i’m studying econ back in the day…what a waste of time that was…stuff like this is almost complete waste of time…couple this with the fact we had to do it with calculus sickens me the way i have been misled…

Haha, am studying it right now.

But then there’s a hidden good being purchased – prestige.

To my knowledge, there has never been an actual example of a Giffen good (don’t say potatoes in Ireland, that was already debunked).

Also, the original question/answer seems very poorly written.