Chapter 10 - The Rational Consumer

Question 1

Utility

Answer 1

The measure of satisfaction from consumption

Question 2

Consumption bundle

Answer 2

The collection of all the goods and services consumed by that individual

Question 3

Utility function

Answer 3

Gives the total utility generated by their consumption bundle

Question 4

Marginal utility

Answer 4

The change in utility from consuming an additional unit

Question 5

Diminishing marginal utility

Answer 5

Each additional unit of a good adds less to utility than the previous unit

Question 6

Budget constraint

Answer 6

Requires that the cost of a consumers consumption bundle be no more than the consumers income

Question 7

Consumption possibilities

Answer 7

The set of all consumption bundles that can be consumed given the customers income and prevailing prices

Question 8

Optimal consumption bundle

Answer 8

Maximizes a consumers total utility given their budget constraint

Question 9

Marginal utility

Answer 9

Additional utility the consumer gets from consuming one more unit of a good or service

Question 10

When comparing utility from consumption

Answer 10

Adjust your spending toward the goods that give you more marginal utility per dollar

Question 11

Optimal consumption rule

Answer 11

A consumer chooses a consumption bundle for which the marginal utility per dollar spent on all goods if the same

Question 12

Substitution effect

Answer 12

The change in quantity consumed of that good as the consumer substitutes the good that has become relatively cheaper for the good that has become relatively more expensive

Question 13

Income effect

Answer 13

The change in the quantity consumed of a good that results from a change in consumers purchasing power due to the change in the price of the good

Question 14

Giffen good

Answer 14

Inferior good for which the income effect outweighs the substitution effect and the demand curve slopes upward