Chapter 5 The Consumption Decision

Question 0

normal goods

Answer 0

consumption increases as income increases

Question 1

income elasticity of demand

Answer 1

measures how much consumption of a particular good increases with income
income elasticity of demand = % change in consumption / % change in income

Question 2

inferior goods

Answer 2

consumption decreases as income increases (negative income elasticity)

Question 3

income effect

Answer 3

reduced consumption of a good whose price has increased; this decrease in buying power often causes reduced consumption of all goods, including the higher priced good

Question 4

substitution effect

Answer 4

reduced consumption of a good due to an increase in price that leads to a trade-off of the good for a relatively less expensive substitute good

Question 5

utility

Answer 5

benefits from consumption individuals get from the combination of goods they consume

Question 6

marginal utility

Answer 6

extra utility of an individual unit of a good

Question 7

diminishing marginal utility

Answer 7

as an individual accumulates more and more of a good, each successive increment increases his/her utility less

Question 8

consumer surplus

Answer 8

the difference between what you paid and what you would have been willing to pay (area under demand curve but above price)

Question 9

behavioral economics

Answer 9

field of economics that rejects the basic model of consumer choice, arguing instead to draw upon the findings of psychologists and economists who conduct laboratory experiments to study the ways people actually make choices

Question 10

endowment effect

Answer 10

people value more highly the items they happen to possess

Question 11

loss aversion

Answer 11

individuals are particularly sensitive to losses

Question 12

status quo bias

Answer 12

reference points of consumption may matter more than absolute consumption in terms of utility; behavior tends toward the default

Question 13

indifference curve

Answer 13

gives the combination of goods among which an individual has no preference, or which yield the same level of utility

Question 14

marginal rate of substitution

Answer 14

slope of indifference curve; how much of a good an individual is willing to give up in return for one more unit of another good

Question 15

diminishing marginal rate of substitution

Answer 15

as an individual has more of one good, it takes less and less of the other good to compensate for each one unit decrease in quantity of the first good