Chapter 6

Question 1

perfect knowledge

Answer 1

The assumption that households possess a knowledge of everything available in the market and that firms have all available information concerning wage rates, capital costs, technology and output prices.

Question 2

perfect competition

Answer 2

An industry structure in which there are many firms, each being small relative to the industry and producing virtually identical products, and in which no firm is large enough to have any control over prices.

Question 3

homogenous products

Answer 3

Undifferentiated outputs; products that are identical to or indistinguishable from one another.

Question 4

budget constraint

Answer 4

The limits imposed on household choices by income, wealth, and product prices.

Question 5

choice set/opportunity set

Answer 5

The set of options that is defined and limited by a budget constraint.

Question 6

real income

Answer 6

The set of opportunities to purchase real goods and services available to a household as determined by prices and money income.

Question 7

utility

Answer 7

The satisfaction a product yields.

Question 8

marginal utility (MU)

Answer 8

The additional satisfaction gained by the consumption of use of one more unit of a good or service.

Question 9

law of diminishing marginal utility

Answer 9

The more of any one good consumed in a given period, the less satisfaction (utility) generated by consuming each addition (marginal) unit of the same good.

Question 10

utility-maximizing rule

Answer 10

Equating the ratio of the marginal utility of a good to its price for all goods.

Question 11

diamond/water paradox

Answer 11

(1) the things with the greatest value in use frequently have little/no value in exchange and (2) the things with the greatest value in exchange have little/no value in use.