chapter 6

Question 1

utility

Answer 1

satisfaction that a consumer receives from consuming some good or service

Question 2

total utility

Answer 2

total satisfaction resulting from the consumption of a given commodity by a consumer

Question 3

marginal utility

Answer 3

the additional satisfaction obtained from consuming one additional unit of a commodity

Question 4

marginal utility of successive units of a particular product (increases/decreases) over some period of time

Answer 4

decreases

Question 5

what does a utility-maximizing consumer do?

Answer 5

allocates expenditures so that the marginal utility obtained from the last dollar spent on each product is equal

Question 6

what is MUx?

Answer 6

marginal utility of product X

Question 7

what’s the formula for utility maximization?

Answer 7

(MUx/px) = (MUy/py)

Question 8

why does the demand curve have a negative slope?

Answer 8

when the price falls, the consumer responds by increasing purchases of that product restore that marginal utility

Question 9

how do you make a market demand curve?

Answer 9

horizontally sum the individual demand curves of the product

Question 10

substitution effect

Answer 10

reaction of the consumer to the change in relative prices, purchasing power (real income) held constant

Question 11

income effect

Answer 11

reaction of the consumer to the change in purchasing power (real income) that is caused by the price change, holding relative prices constant

Question 12

the substitution effect leads the consumer to (increase/decrease) purchases of the product whose relative price has fallen

Answer 12

increase

Question 13

a fall in one price will lead to an (increase/decrease) in the consumer’s real income, and thus to (increase/decrease) purchases of all normal goods

Answer 13

increase; increase

Question 14

what is a Giffen good?

Answer 14

when the INCOME effect is strong enough to outweigh the substitution effect

Question 15

consumer surplus

Answer 15

difference between what consumers would be willing to pay for that unit and what they actually pay

Question 16

what makes consumer surplus possible?

Answer 16

consumers purchase units of a product until the marginal value equals the market price - on all units before the marginal unit, consumers value the product more than the price

Question 17

what is the paradox of value?

Answer 17

the price of necessary products remains low despite that its demand remains high (like water)

Question 18

total value

Answer 18

area under the demand curve

Question 19

marginal value

Answer 19

placed on one additional unit - given by the product’s market price

Question 20

what concepts does the paradox of value confuse?

Answer 20

total and marginal value

Question 21

how to solve the paradox of value?

Answer 21

consider supply; e.g. consumers get more value from a large quantity of water vs they get more value from a small quantity of diamonds; the large supply of water makes it low in price

high total value + low price = large consumer surplus

Question 22

true or false: price bears a relationship in the total value that consumers place on all of the units consumed of a product

Answer 22

false - price is related to the MARGINAL value

Question 23

the area under the demand curve and above the price line is….

Answer 23

total consumer surplus

Question 24

true or false: a Giffen good is an inferior good

Answer 24

true

Question 25

the demand curve of a Giffen good has a (positive/negative) slope

Answer 25

positive

Question 26

real income

Answer 26

income expressed in terms of the purchasing power of money income - the quantity of goods and services that can be purchased with the money income

Question 27

what are the two assumptions of the indifference theory?

Answer 27

1. Marginal Rate of Substitution (MRS) is always negative

2. MRS diminishes (slope becomes less steep)

Question 28

budget lines shows:

Answer 28

combinations of products that are available to the consumer given their money income and prices of the goods that they purchase

Question 29

opportunity of one good in terms of:

Answer 29

all other goods; measured by the abs val of the slope of the budget line

Question 30

where is utility maximized on the indifference curve?

Answer 30

where the budget line is tangent to it (marginal rate of substitution equals relative prices of 2 goods)