CHAP. 6

Question 1

WHAT IS UTILITY?

Answer 1

The satisfaction that a consumer receives from consuming some good or service.

Question 2

WHAT IS TOTAL UTILITY

Answer 2

The consumer’s total satisfaction resulting from the consumption of a given product.

Question 3

WHAT IS MARGINAL UTILITY

Answer 3

The additional satisfaction obtained from consuming one additional unit of a product.

Question 4

WHAT TENDANCY DOES THE MARGINAL UTILITY HAVE

Answer 4

Deminishing marginal utility:
The utility that any consumer derives from successive units of a particular product consumed over some period of time diminishes as total consumption of the product increases.

Question 5

WHY IS MUx ALWAYS POSITIVE AND Ux ALWAYS POSITIVELY SLOPED

Answer 5

Because x is a good

Question 6

WHAT DO CUSTOMERS SEEK TO DO

Answer 6

Consumers seek to maximize their total utility subject to the constraints they face

Question 7

WHAT CONSTRAINTS DO CUSTOMERS FACE

Answer 7

Their income and the market price

Question 8

HOW DO CUSTOMERS MAXIMIZE THEIR UTILITY

Answer 8

A utility-maximizing consumer allocates expenditures so that the marginal utility obtained from the last dollar spent on each product is equal

Question 9

WHAT IS THE UTILITY-MAXIMIZING CONDITION

Answer 9

MUx/Px = MUy/Py or MUx/MUy = Px/Py

Question 10

WHAT ARE POLICY NUDGES

Answer 10

Interventions that preserve freedom of choice, but that also steer people in certain directions

Question 11

WHAT IS THE HYPOTHESIS OF DEMINISHING MARGINAL UTILITY

Answer 11

As a consumer buys less of a product, the marginal utility rises

Question 12

WHAT HAPPENS WHEN PRICE OF x RISES

Answer 12

A rise in the price of a product leads each utility-maximizing consumer to reduce the quantity demanded of the product

Question 13

WHAT DOES THE THEORY OF CONSUMER BEHAVIOR PREDICT?

Answer 13

A negatively sloped market demand curve as well as a negatively sloped demand curve for each individual consumer.

Question 14

WHICH TWO EFFECTS DOES THE CHANGE IN PRICE HAVE

Answer 14

It alters the relative price and it changes consumers’ real income.

Question 15

WHAT IS THE REAL INCOME

Answer 15

Income expressed in terms of the purchasing power of money income—that is, the quantity of goods and services that can be purchased with the money income.

Question 16

WHAT IS THE SUBSTITUTION EFFECT

Answer 16

The change in the quantity of a product demanded resulting from a change in its relative price (holding real income constant).

Question 17

WHAT IS THE EFFECT OF THE SUBSTITUTION EFFECT

Answer 17

The substitution effect increases the quantity demanded of a product whose price has fallen and reduces the quantity demanded of a product whose price has risen.

Question 18

WHAT IS THE INCOME EFFECT

Answer 18

The change in the quantity of a product demanded resulting from a change in real income (holding relative prices constant).

Question 19

WHAT IS THE EFFECT OF THE INCOME EFFECT

Answer 19

The income effect leads consumers to buy more of a product whose price has fallen, provided that the product is a normal good.

Question 20

THE INCOME EFFECT DEPENDS ON WHAT

Answer 20

The amount of income spent on the product whose price changes and on the amount by which the price changes.

Question 21

WHAT ARE GIFFEN GOODS?

Answer 21

• Products with a positively sloped demand curve
• Two characteristics : inferior good and take a large proportion of total household expenditure (large income effect)

Question 22

HOW DO THE SUBSTITUTION AND INCOME EFFECT AFFECT THE QUANTITY DEMANDED

Answer 22

For any ordinary goods :
- Normal goods: the sub and inc effect work in the same way
- Inferior goods: the sub and inc effect work in opposite ways but the sub effect is greater

For any Giffen goods (the demand curve is positively sloped)
- Some inferior goods: the sub and inc effect work in opposite ways but the inc effect is greater

Question 23

WHAT IS THE CONSUMERS SURPLUS

Answer 23

The difference between the total value that consumers place on all units consumed of a product and the payment that they actually make to purchase that amount of the product.

Question 24

WHAT SHOWS THE TOTAL VALUE THAT A CUSTOMER PLACES ON A GOOD

Answer 24

The area under the demand curve

Question 25

WHAT SHOWS THE MARKET DEMAND CURVE

Answer 25

The valuation that consumers place on each unit of the product

Question 26

WHAT SHOWS THE CONSUMER SURPLUS

Answer 26

For any given quantity, the area under the demand curve and above the price line