Chapter 6 - Consumer behaviour

Question 1

What motivates consumer

Answer 1

maximizing their utility

Question 2

Utility def

Answer 2

Total satisfaction deriving from the goods and services consumed

Question 3

Total utility def

Answer 3

Full satisfaction from the consumption of a product by a consumer

Question 4

Marginal utility def

Answer 4

Additional satisfaction resulting from consuming one more unit of a product

Question 5

Utility vs qt bought (consumed)

Answer 5

Utility of successive units of a product decreases as total consumption increases. MU falls as the level of consumption rises

Question 6

shape of the utility ressembles which curve

Answer 6

shape of the demand curve

Question 7

it terms of calculus, what is the marginal utility

Answer 7

slope of the total utility function

Question 8

Theory of consumber behavior : individual demand shape and market demand shape

Answer 8

both negatively sloped

Question 9

how consumers can maximize their utility

Answer 9

make sur that utility obtained from last dollar spent on each product is the same

Question 10

2 ways of writing formula for maximal utility. What second one means

Answer 10

MUx/Px = MUy/Py or MUx/MUy = Px/Py

Question 11

2 effects of a change in price

Answer 11

alters relative prices and changes consumer’s real income

Question 12

What is the substitution effect

Answer 12

effect that increases qt demanded of a good if relative price fell and reduces relative price of good if price increased

Question 13

What is the income effect

Answer 13

price changed = my income changed
for a normal good, effect that leads consumers to buy more in price has fallen
for an inferior good, effect that leads consumers to buy less if price has fallen

Question 14

Size of income effect what it depends on (2)

Answer 14

1) Amount of income spent on price changing product

2) How much price changed

Question 15

Overall effect of price change on demand curve

Answer 15

Combination of substitution effect and income effect

Question 16

what substitution effects tends to do on demand curve

Answer 16

increase qt demanded

Question 17

what income effect tends to do on demand curve

Answer 17

increase qt demanded for a normal good. Decrease qt demanded for an inferior good

Question 18

Normal good demand curve

Answer 18

Subs effect and income effect work in the same direction

Question 19

Normal good demand curve : which is more important subs effect of income effect and why

Answer 19

Substitution effect. Income effect is small because the increase in purchasing power coming from income effect is low

Question 20

Inferior good demand curve

Answer 20

Subs effect and income effect work in opposite directions but subs > income effect. steeper demand curve

Question 21

Giffen good

Answer 21

Inferior good for which the demand curve is + sloped. income effect > subs effect

Question 22

What is to remember about demand curves for normal, inferior and inferior Giffen good

Answer 22

Individual demand curves

Question 23

Goods consumed for their snob appeal and status they confer -> why they do not violate theory of utility maximization ?

Answer 23

1) Consumers will buy more if price drops (as long as people think they paid the high price)
2) Very unlikely that the demand curve is positively sloped

Question 24

On an individual demand curve, what is the surplus for a unit of product bought

Answer 24

for the q unit, the surplus is the price associated minus the price at which it’s going to be bought

Question 25

Utility vs surplus

Answer 25

Sum of prices we were willing to pay for each product q = utility. Sum of (prices we were willing to pay for each product q - price at which products were bought)

Question 26

In general, what is the MU on the individual demand curve

Answer 26

Price of last unit bought (shows the value we give to this unit)

Question 27

Value and utility

Answer 27

Synonyms (kind of)

Question 28

2 ways of determining value placed by a consumer on total consumption of some product

Answer 28

1) Sum of valuations placed on each unit

2) How much consumer would pay if he was to buy all these units if alternative is none

Question 29

What is the paradox of value

Answer 29

You can have invaluable goods at low prices (ex . water) and unneccesary goods at high prices (ex. diamonds)

Question 30

Solution to paradox of value

Answer 30

Supply has to be taken into account -> will determine eq price

Question 31

What is the MU (or marginal value) associated with on the demand curve of an individual

Answer 31

Product price

Question 32

Consumer surplus and MU for water

Answer 32

Low MU because low price but valued highly so high consumer surplus

Question 33

Consumer surplus and MU for diamond

Answer 33

High MU because high price but not too much value (it’s necessary) so low consumer surplus