Utility

Traps in Utility

• Picks a closely related concept
  Learn related terms as contrasting pairs with one-line definitions, and identify which one the stem describes.
• Mismatches factors of production and rewards
  Land → rent; labour → wages; capital → interest; entrepreneur → profit.
• Uses the everyday meaning of a term
  Economic terms have precise definitions. Recall the textbook definition before matching.
• Reverses the direction of the effect
  Trace the chain step by step (e.g. buying securities → banks gain cash → money supply rises) and check the sign at every link.
• Utility theory errors
  Marginal utility = change in total utility from one more unit; it diminishes. Total utility is maximum when MU = 0. Consumer equilibrium: MUa/Pa = MUb/Pb.
• Applies the rule for the opposite case
  Before answering, name the case in the stem (inelastic? price floor ABOVE equilibrium? point INSIDE the PPC?) and recall the rule for that case only.
• Confuses channels of distribution
  Producer → wholesaler → retailer → consumer. Wholesalers buy in bulk, break bulk, store, finance retailers and bear risk. Retailers sell in small quantities to final consumers.
• Confuses central and commercial bank functions
  Central bank: issues currency, banker to government and banks, lender of last resort, monetary policy. Commercial banks: deposits, loans, payments for the public.