Chapter 4: UTILITY MAXIMIZATION

Question 1

The various combinations of two goods that are affordable given consumer income; a constraint on utility maximization

Answer 1

budget constraint

Question 2

A graph of the possible options within a budget with one of the options on the x-axis (e.g., meals out) and the other option on the y-axis (e.g., meals at home)

Answer 2

budget constraint line

Question 3

The point at which consumers are receiving maximum utility

Answer 3

consumer equilibrium

Question 4

The concept that, at a certain point, additional utility decreases with each unit added

Answer 4

law of diminishing marginal utility

Question 5

The additional utility provided by one additional unit of consumption

Answer 5

marginal utility

Question 6

The amount of additional utility received divided by the product’s price; “bang for your buck.”

Answer 6

marginal utility per dollar

Question 7

Satisfaction derived from the choices consumers make

Answer 7

total utility

Question 8

Analyzing decisions economic actors make and how those decisions affect their utility

Answer 8

utility maximization

Question 9

The idea that people are doing the best that they can when they make decisions

Answer 9

utility maximization framework

Question 10

Units of utility; relative and subjective to the individual

Answer 10

utils

Question 11

An effect caused by a change in budget (a change in affordable combinations), resulting in increased consumption of inferior goods and decreased consumption of normal goods

Answer 11

income effect

Question 12

Goods that people consume less of if they have more money and more of if they have less money

Answer 12

inferior goods

Question 13

Goods that people consume more of if they have more money and less of if they have less money

Answer 13

normal goods

Question 14

An effect caused by the change in the price of goods (change in slope), resulting in reduced consumption of expensive goods and increased consumption of cheaper goods

Answer 14

substitution effect

Question 15

A process used when forming judgments; people first pick an initial estimate, then adjust up or down as necessary

Answer 15

anchor and adjustment

Question 16

Uses psychological insights to identify systematic ways in which we act differently than what the model of utility maximization predicts; investigates how given dollar amounts mean different things to individuals depending on the situation

Answer 16

behavioral economics

Question 17

For any two outcomes, either you have a preference toward one or you are indifferent toward both

Answer 17

completeness

Question 18

Having equal value to the individual, regardless of the situation

Answer 18

fungible

Question 19

When we increase our consumption choices to stay in line with the consumption patterns around us; “keeping up with the Joneses”

Answer 19

positional arms races

Question 20

Preferences that depend on an existing reference point

Answer 20

reference-dependent preferences

Question 21

The phenomenon whereby consumers will tend to have a specific change in preference between two options when also presented with a third option that is asymmetrically dominated

Answer 21

the decoy effect

Question 22

The phenomenon in which ownership of a good increases one’s valuation of it by roughly a factor of 2

Answer 22

the endowment effect

Question 23

If A is preferred to B, and B is preferred to C, then A is preferred to C

Answer 23

transitivity

Question 24

MU formula

Answer 24

change in total utility / change in quantity

Question 25

a $1 loss pains us 2.25 times more than a $1 gain

Answer 25

loss aversion