Chapter 4: Consumer Theory

Question 1

In the analysis of consumer behavior, we rely on the foundation that?

Answer 1

Individuals will choose goods and services that they deem value the most.

Question 2

denotes satisfaction, a subjective pleasure that an individual can derive from consuming a good or service.

Answer 2

Utility

Question 3

What is Utility in Economics?

Answer 3

it explains how individuals divided their limited resources among the commodities that provide them satisfaction

Question 4

What is Utility in Psychology?

Answer 4

it is a neural reaction that can be measured.

Question 5

A subfield of microeconomics that studies the relationship between preferences and consumption expenditures and consumer demand curves.

Answer 5

Consumer Choice

Question 6

Consumer choice examines?

Answer 6

how consumers maximize the desirability of their consumption as measured by their preferences while adhering to budget constraints.

Question 7

Consumption is separated from production because two different _____ ____ are involved. Individuals’ _____ and_____ determine the amount of pleasure people derive from the goods and services they consume while a producer might make something that he would not consume himself; therefore, different ______ and ______ are involved.

Answer 7

economic agents
preferences and tastes
motivations and abilities

Question 8

Prominent variables used to explain the rate at which the good is purchased, demanded

Answer 8

• Price per unit
• Prices of related goods
• Wealth of the consumer

Question 9

As the price of good rises, consumers will substitute away from that good, choosing more of other alternatives.

Answer 9

Substitution Effect

Question 10

Substitution effect – the ____ in consumption that results when a ____ ____ moves the consumer _____ a given ______ ______ to a point with __ ______ ___ of ____________.

Answer 10

change
price change
along a given indifference curve
new marginal rate of substitution

Question 11

As the wealth of the individual rises, demand for most products increases, shifting the demand curve higher at all possible prices.

Answer 11

Income Effect

Question 12

Income effect – the change in _____ that results when a _____ _____ moves the consumer to a _____ or _____ ______ _____.

Answer 12

consumption
price change
higher or lower indifference curve

Question 13

It uses cardinal ranking preferences, which assign numerical values to different levels of satisfaction. It ranks the magnitude of how much a consumer prefers a good.

Answer 13

Cardinal Utility Theory

Question 14

People can only rank their preferences. It does not rank the magnitude of how much a consumer prefers a good.

Answer 14

Ordinal Utility Theory

Question 15

This law states that as an individual consumes more units of commodity per unit of time, his/her total utility increases, reaches its maximum, and starts to decrease. Meaning, that as more goods are consumed, the extra satisfaction or marginal utility received decreases.

Answer 15

Law of Diminishing Marginal Utility

Question 16

The Law of Diminishing Marginal Utility states that as an individual consumes ____ _____ of _____ per unit of time, his/her ____ _____ increases, reaches its ______, and starts to ______.

Answer 16

more units of commodity
total utility
maximum
decrease

Question 17

As more goods are consumed, the _____ _____ or _____ ______ received decreases.

Answer 17

extra satisfaction or marginal utility

Question 18

The Law of Diminishing Marginal Utility is intrinsically linked to the concept of ______ _____ . As the product’s utility decreases with increased consumption, consumers are willing to ____ ____ for more of the product.

Answer 18

declining prices

pay less

Question 19

Law of Diminishing Marginal Utility has an effect on businesses’ ______ ______, as the price charged for an item should be _____ to the consumers’ _____ _____ and ______ to consume or utilize the good.

Answer 19

pricing strategies
proportional
marginal utility and willingness

Question 20

the state in which a consumer derives the greatest utility from the consumption of one or more goods or services given his/her level of income

Answer 20

Consumer Equilibrium

Question 21

Consumer Equilibrium =

Answer 21

Maximum Satisfaction + Full Utilization of Budget

Question 22

At that point of equilibrium between total utility and income, a product’s marginal utility equals its _ ___ ____.

Answer 22

1 unit price

Question 23

MUn =

Answer 23

Total Utility n - Total Utility n-1

Question 24

Marginal Utility =

Answer 24

Change in Total Utility divided by Change in Quantity

Question 25

Consumer Equilibrium is achieved when

Answer 25

MU = MUx/Px = MUy/Py

Question 26

A rational consumer would continue to purchase ___ or ____ of a commodity until such derived from it ____ _____ meets the ____ of the commodity

Answer 26

more or less
marginal utility
price

Question 27

If MU > P, what happens?

Answer 27

consumer consumes more

Question 28

If MU < P, what happens?

Answer 28

consumer consumes less

Question 29

It shows the different combinations of goods X and good Y which yield the same level of utility.

Answer 29

Indifference Curve

Question 30

Any points within the indifference curve consider the consumer _____ or ______ ______.

Answer 30

indifferent or equally satisfied

Question 31

A collection of indifference curves

Answer 31

indifference map

Question 32

Characteristics of Indifference curves

Answer 32

1. Negatively Sloped / Downward Sloping
2. Convex to the Origin
3. Do not Intersect
4. Higher Indifference curves are preferred than lower ones.

Question 33

Why do indifference curves are negatively sloped?

Answer 33

Reflects the consumers’ willingness to substitute one good for the other.

Question 34

Why do indifference curves are convex to their origin?

Answer 34

Because of the marginal rate of substitution, consumption of one good results in a decrease in the consumption of the other good.

Question 35

Why do indifference curves not intersect?

Answer 35

Different indifference curves show different levels of satisfaction. Therefore, the intersection of indifference curves would make points within both of it meaningless because it will convey same level of satisfaction.

Question 36

Why higher Indifference curves are preferred than lower ones?

Answer 36

• Higher indifference curves represent higher level of satisfaction because it has more of both goods. Therefore, consumers prefer higher indifference curves.

Question 37

the limit on the consumption bundles that a consumer can afford.

Answer 37

Budget Constraint

Question 38

Slope of Budget Constraint =

Answer 38

Change of quantity of commodity Y divided by Change of quantity of commodity X

Question 39

Marginal Rate of Substitution=

Answer 39

Change of quantity of commodity Y divided by Change of quantity of commodity X

Question 40

MRS > Px/Py (Market rate of exchange)

Answer 40

The consumer will consume more of X and less of Y.

Question 41

MRS < Px/Py (Market rate of exchange)

Answer 41

The consumer will consume more of Y and less of X.

Question 42

MRS = Px/Py (Market rate of exchange)

Answer 42

The consumer will not change consumption.

Question 43

a good for which an increase in the price raises quantity demanded.

Answer 43

Giffen Good