Chapter 6

Question 1

What is the behavioral assumption in economics

Answer 1

individuals and firms maximize
their personal well-being and/or their profits.

May have other goals in addition: philanthropy and the well-being of others

Question 2

The theory of individual maximization is based on

Answer 2

individuals must act in a rational manner in order to achieve their goals

Question 3

What is cardinal utility

Answer 3

A measurable concept of satisfaction- not so achieved, also called measurable utility

Question 4

Total utility is

Answer 4

A measure of the total satisfaction from consumption derived from consuming all of the units over a time period

Question 5

Total utility is calculated as

Answer 5

The sum of marginal utilities

Question 6

What is the principle of non-satiation

Answer 6

More is always better

Question 7

Though more is always better, what happens with increasing units of the good

Answer 7

At the additional unit of good satisfaction goes down -> diminishing marginal utility

Question 8

Formula for marginal utility

Answer 8

Marginal Utility =
additional utility/
additional consumption
or, MU =
deltaU
delta C
,

Question 9

Total utility __ with the amount consumed, marginal utility __ with the amount consumed

Answer 9

Increases

Declines

Question 10

MU is ___ of the TU function

Answer 10

a slope

Question 11

How consumer should allocate income

Answer 11

Where it yields the greatest utility per dollar

Question 12

When does consumer equilibrium occurs

Answer 12

when marginal utility per dollar spent on the last unit

of each good is equal.

Question 13

Equilibrium for budget allocation

Answer 13

MUs/Ps=MUj/Pj
or
MUs/MUj=Ps/Pj.

Question 14

Budget allocation rule

Answer 14

The consumer chooses the quantities based on marginal utility rather than on total utility

Question 15

The law of demand states

Answer 15

The law of demand states that, other things being equal, more of a good is demanded
the lower is its price

Question 16

Why demand curve is shaped downwards

Answer 16

MUs/Ps=MUj/Pj
Relationship should stay the same

If the price of any good falls, then, in order for the
equilibrium condition to be re-established, the MU of that good must be driven down also. Since
MU declines when more is purchased, this establishes that demand curves must slope downwards

Question 17

What is ordinal utility

Answer 17

Ordinal utility assumes that individuals can rank commodity bundles in accordance
with the level of satisfaction associated with each bundle.

Question 18

What is the budget constraint

Answer 18

The budget constraint defines all bundles of goods that the consumer can afford with
a given budget.

Question 19

Income is equal to

Answer 19

Expenditure on snowboarding+expenditure on Jazz= Price of Squantity of S+Price of J quantity of J

Question 20

Slope of the budget line

Answer 20

P(x)/P(y)

Question 21

What is bound by the budget line

Answer 21

The set of feasible or affordable

the non-affordable set lies strictly above the budget line

Question 22

The slope of the budget line is the same as

Answer 22

sacrifice cost

Question 23

What is an indifference curve

Answer 23

defines combinations of goods and services that yield the same
level of satisfaction to the consumer.

Question 24

Four properties of indifference maps

Answer 24

1. Indifference curves further from the origin reflect higher levels of satisfaction.
2. Indifference curves are negatively sloped. This reflects the fact that if a consumer gets more
   of one good she should have less of the other in order to remain indifferent between the two
   combinations.
3. Indifference curves cannot intersect. If two curves were to intersect at a given point, then we
   would have two different levels of satisfaction being associated with the same commodity
   bundle—an impossibility.
4. Indifference curves are convex when viewed fromthe origin, reflecting a diminishingmarginal
   rate of substitution.

Question 25

Slope of the indifference curve shows

Answer 25

the marginal rate of substitution , It defines
the amount of one good the consumer is willing to sacrifice in order to obtain a given
increment of the other, while maintaining utility unchanged.

Question 26

Diminishing marginal rate of substitution reflects a

Answer 26

higher marginal value being

associated with smaller quantities of any good consumed.

Question 27

How to determine the combination of goods that will bring the highest satisfaction

Answer 27

Intersection of budget line and the highest indifference curve

Question 28

Slope of the indifference curve

Answer 28

-Px/Py

Question 29

What is equal to make indifference curve and budget line to cross

Answer 29

Tangency ( slope) at the intersection point should be the same

Question 30

How income change will cause changes in the graphics of budget

Answer 30

Parallel outward shift

Question 31

What happens with graphs when price changes

Answer 31

If jazz (x -axes) costs more, the slope of budget line will change-> become more steeper

Question 32

How to determine substituents with changing price

Answer 32

These goods are
substitutes in this picture, because snowboarding increases in response to an increase in the price
of jazz.

Question 33

What is the achievement of subsidies and income transfers

Answer 33

Increase purchasing power

Question 34

Difference in graph change with government subsidy and income transfer

Answer 34

Income transfer: parallel shift outward
Price subsidy: budget line with rotate- the good with the same price-> no change in axe intercept, where subsidized-> more from 0