Chapter 20: Consumer Choice

Question 1

Utility

Answer 1

a measure of the about of satisfaction you get out of doing something

Question 2

Util

Answer 2

the unit of utility

Question 3

People want to

Answer 3

maximize their total utility

Question 4

Formula for Marginal Utility

Answer 4

change in Total Utility/ change in number of units consumed

Question 5

What can’t you do with Utility

Answer 5

you can’t compare it to someones else, they’re all different scales

Question 6

Law of Diminishing Marginal Utility

Answer 6

Consume more leads to slower increase in utility

Question 7

What if MU increases with total consumption

Answer 7

you just continue consuming that good with any other good consumption, but thats not what happens in real life

Question 8

Water-Dimond Paradox

Answer 8

Diamond Ring & Water Bottle, if you offer one now they will probably pick diamond ring, however if you say that you can never use one for the rest of your life you’d probably pick the water bottle.

Question 9

Why? (water-diamond paradox)

Answer 9

because TU of water > TU of Diamonds, but MU of diamonds > MU of Water

Question 10

Market prices reflect marginal valuations

Answer 10

so they correspond to marginal utilities and not total utilities

Question 11

Consumer choice

Answer 11

limited income necessitates choice

Question 12

consumers make decisions

Answer 12

purposefully (to maximize total utility)

Question 13

One good can be ______ for another

Answer 13

substitutes

Question 14

how do Consumers make decisions

Answer 14

without perfect information, but knowledge and past experience help

Question 15

When should you stop consuming with only one good

Answer 15

when P=MB

Question 16

New rule for many goods

Answer 16

equalize the marginal utility on the last dollar spend on each good

Question 17

when price of something goes up

Answer 17

you buy less of it

Question 18

changes in behavior =

Answer 18

substation effect + real income effect

Question 19

“Real” income:

Answer 19

actual things, not money bills

Question 20

What does price change?

Answer 20

your wealth

Question 21

Cutting the price of goods in half

Answer 21

doubles your wealth

Question 22

When prices go up

Answer 22

you buy less stuff

Question 23

Real income effect is larger for

Answer 23

more expensive goods ( you get more extra wealth if the price of cars if down 5% than if the price of water is down 5%)

Question 24

price changes will induce you to

Answer 24

substitute/change what you buy

Question 25

Why does the demand curve slope down: Substitution Effect

Answer 25

as the price of a good falls, consumers real wealth increases so they buy more of that good

Question 26

Why does the demand curve slope down: Real-Income Effect

Answer 26

as the price of a good falls, consumers real wealth increases so they buy more of that good

Question 27

Why does the demand curve slope down: Diminishing MU

Answer 27

as the quantity increases, the consumer is willing to pay less for additional units

Question 28

Which of the following is not one of the basic fundamentals of consumer choice?

a) Limited income forces us to make choices
b) Diminishing marginal utility
c) Only relative prices matter
d) People are willing to pay up to the amount of total utility they will get by consuming a good
e) One good can be substituted for another

Answer 28

Diminishing marginal utility