Chapter 5: Demand

Question 1

reservation price or willingness to pay

Answer 1

the maximum price you’d pay for an item, which is
reflective of the additional (marginal) benefit you
expect to derive from the good
(similar to cost/benefit principle)

Question 2

cost-benefit principle

Answer 2

take an action if the marginal benefit of the action is at least as great as the marginal cost of the action

Question 3

if reservation price is less than the cost of the item

Answer 3

do not buy the item

Question 4

if reservation price is greater than or equal to the cost of
the item

Answer 4

buy the item

Question 5

budget constraint

Answer 5

shows the limits of a household’s consumption

Question 6

utility

Answer 6

the satisfaction one derives from a purchase or activity
- measured indirectly
- subjective
- cannot be compared between people

Question 7

marginal utility

Answer 7

the additional utility gained from consuming an additional unit of a good