Chapter 3

Question 1

Define budget constraint

Answer 1

defined by the income available for consumption and the prices that a consumer faces. This constraint defines the feasible set of consumption choices facing a consumer

Question 2

define consumption bundles

Answer 2

quantities of various goods or services that a consumer might consume

Question 3

define disposable income

Answer 3

personal income after the payment of tax obligations

Question 4

define Engel’s Law

Answer 4

as disposable income of a consumer increases, the percentage of income spent for food decreases if all other factors remain constant

Question 5

define indifference curve

Answer 5

a graph of the locus of consumption bundles that provide a consumer a given level of satisfaction

Question 6

define law of diminishing marginal utility

Answer 6

marginal utility declines as more of a good or service is consumed during a specific period of time

Question 7

define marginal rate of substitution

Answer 7

the rate of exchange of pairs of consumption goods or services to leave utility or satisfaction unchanged, or the absolute value of the slope of an indifference curve

Question 8

define marginal utility

Answer 8

the change to utility or satisfaction as consumption of a good is increased by one unit

Question 9

define total utility

Answer 9

the total satisfaction derived from consuming a given bundle of goods and services

Question 10

define utility function

Answer 10

a mathematical or functional representation of the satisfaction derived from consumption of goods or services

Question 11

define utils

Answer 11

imaginary units of satisfaction derived from consumption of goods or services