CH7: Utility maximization Flashcards
1
Q
What is diminishing marginal utility
A
consumer satisfaction decline as more people buy it
2
Q
What are the assumptions about consumers?
A
Rational
Budget constraint
preferences
3
Q
Marginal utility per dollar:
A
marginal utility/ price
4
Q
Maximizing utility:
A
MU OF Product A/Price of A = MU OF product b/Price of B
5
Q
Income effect
A
as the price decreases, consumer real income increases which allows the consumer to buy more of that product.
6
Q
Substitution Effect
A
as the price of the product decreases, the product will have a higher demand and encourage consumers to replace it with other products that are more expensive.
