Chapter 13- Consumer Choice And Demand

Question 1

Describes the limits to consumption choices and depends on a consumers budget and the prices of goods and services

Answer 1

Budget line

Question 2

Budget increases, consumption possibilities expand

Budget decreases, consumption possibilities decrease

Answer 2

Change in budget

Question 3

Steeper line comes inward,
ex: if water bottle price rises from $1 to $2, budget line comes inward and becomes steeper
If price falls—> line becomes less steeper

Answer 3

Budget line changes

Question 4

Price of one good in terms of another good
Equals the price of one good divided by the price of another good
Equals the slope of the budget line

Answer 4

Relative price

Question 5

Benefit or satisfaction that a person gets from the consumption of a good or service

Answer 5

Utility

Question 6

TOTAL BENEFIT that a person gets from consuming a good or service
Generally increases as the quantity consumed of a good increases

Answer 6

Total utility

Question 7

Change in total utility that results from a one unit increase in the quantity of a good consumed
Ex: consuming 3 water bottles has a total utility of 36
consuming 2 water bottles has a total utility of 27
Marginal utility= 36-27= 9 units

Answer 7

Marginal utility

Question 8

When marginal utility decreases as you consume more and more of a good
Tendency for Marginal utility to decrease over time as consumption of a good increases

Answer 8

Diminishing marginal utility

Question 9

Total utility graph and marginal utility slope increases

Diminishing marginal utility graph slope decreases

Answer 9

Graphs

Question 10

Consumer maximizes total utility by
Choosing a point on the budget line at which the sum of the utilities obtained from all goods is as large as possible

Answer 10

Maximizing total utility

Question 11

Allocate the entire available budget(compare all combinations of items you can obtain with that budget)

Make the marginal utility per dollar equal for all goods (divide marginal utility of a good by its price)

Answer 11

Utility maximizing rule

Question 12

Ex:
Buy more gum and buy less water
Marginal utility for gum decreases
Marginal utility for water increases

Answer 12

Marginal utility theory

Question 13

Maximum price a consumer is willing to pay for an extra unit of a good or service when total utility(total benefit) is maximized

Answer 13

Marginal benefit

Question 14

A line that shows combinations of goods among which a consumer is indifferent
Points BELOW the curve are NOT PREFERRED because they are worse than the points on the curve
Points ABOVE the curve are PREFERRED because they are better than the points on the curve

Answer 14

Indifference curve

Question 15

Rate at which a person will give up good y (measured on the y axis) to get more of good x (measured on x axis) and at the same time remain on the same indifference curve

Answer 15

Marginal rate of substitution

Question 16

Tendency for the marginal rate of substitution to decrease as the consumer moves down the indifference curve
Moving down the indifference curve means increasing consumption of good x and decreasing consumption of good y

Answer 16

Diminishing marginal rate of substitution