Ch.10- Consumer Choice

Question 1

Law of Demand

Answer 1

whenever the price of a good falls, the quantity demanded increases

Question 2

Economic model of consumer behavior

Answer 2

predicts that consumers will choose to buy the combination of goods/services that makes them as well off as possible (within their budget)

Question 3

Utility

Answer 3

the enjoyment/satisfaction someone receives from consuming a product
-not possible to measure directly

Question 4

Marginal Utility

Answer 4

the change in total utility a person receives from consuming 1 additional unit of a good/service

Question 5

Law of Diminishing Marginal Utility

Answer 5

relationship between consuming more of a product and the decrease in total satisfaction over time

Question 6

Budget Constraint

Answer 6

the limited amount of income one has available to spend on goods/services

Question 7

Income effect

Answer 7

The change in the quantity you will demand of a good changes based on your income

Question 8

Rule of equal marginal utility per dollar spent

Answer 8

Consumers maximize utility by EQUALIZING the marginal utility per dollar spent across goods/services

Question 9

Calculating marginal utility

Answer 9

Change in total utility/ change in no. of units consumed

Question 10

Substitution effect

Answer 10

change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods

Question 11

Social influences on decision making

Answer 11

-Network externality: situation in which the usefulness of a product increases with the number of consumers who use it
-Fairness

Question 12

Behavioral Economics

Answer 12

study of situations where people make choices that don’t seem to be ECONOMICALLY rational

Question 13

Mistakes in decision making

Answer 13

1. Taking into account solely monetary costs (but not opportunity costs)
2. Fail to ignore sunk costs (cost that has already been paid/can’t be recovered)
3. Unrealistic about future behavior

Question 14

Endowment effect

Answer 14

The tendency of people to be unwilling to sell a good they already own, even if they are offered a price that is greater than the price they would be willing to pay if they did not already own the good.

Question 15

Models in economics…

Answer 15

• Assumptions in models are not correct, they are unrealistic in order to simplify a complex reality
  -They are best judged by the success of their predictions, rather than the realism of the assumptions

Question 16

Anchoring

Answer 16

if people are uncertain about a value, they often relate or anchor that value to some other known value

Question 17

Consumption bundles

Answer 17

Combinations of consumer preferences

Question 18

Indifference curves

Answer 18

shows the combinations of consumption bundles that give the consumer the same utility
-assuming only 2 goods
-the higher (farther right) the IC is, the greater utility received (bowed inward)

Question 19

Marginal rate of substitution

Answer 19

-slope of the indifference curve
-the rate at which the consumer is willing to trade off one product for another while keeping their utility constant

Question 20

Characteristics of indifference curves

Answer 20

-cannot intersect each other, would violate transivity assumption

Question 21

Transivity assumption

Answer 21

If a person prefers A to B, and B to C, they should prefer A to C

Question 22

Slope of Budget Constraint

Answer 22

price of the good on the horizontal axis/price of the good on the vertical axis
-intersects at the y-axis/x-axis at the maximum amount of the good the consumer can purchase
-consumption bundles on line or inside are affordable, outside line are unaffordable
-slope is CONSTANT

Question 23

How to maximize utility

Answer 23

Consumers must be on the highest indifference curve given their budget

Question 24

When does optimal consumption occur?

Answer 24

When the indifference curve is tangent to the budget constraint curve