Chapter 6 - Consumer Behaviour

Question 1

What is utility?

Answer 1

Total satisfaction/enjoyment from goods and services

Question 2

What is marginal utility?

Answer 2

Additional satisfaction from consuming one more unit of the same product

Question 3

What is diminishing marginal utility?

Answer 3

Marginal utility falls as consumption rises

Question 4

Give an example of the law of diminishing marginal utility

Answer 4

Burger

Question 5

Total utility (inc/dec) with the amount consumed

Answer 5

Increases

Question 6

Marginal utility (inc/dec) with the amount consumed

Answer 6

Decreases

Question 7

What is the equation to maximizing MU?

Answer 7

MUx/Px = MUy/Py

Question 8

Say a > b, how do you make the inequality equal?

Answer 8

Decrease a and increase b

Question 9

What is the difference between nominal and real income?

Answer 9

Nominal: actual money
Real: in terms of purchasing power

Question 10

When price changes, does this effect real or nominal?

Answer 10

Real

Question 11

If the price of an apple increases from $4 to $5, what happens to your nominal income and does your PP increase or decrease?

Answer 11

Nominal stays the same, decrease

Question 12

When price X increases, MUx/MUy < Px/Py, what occurs?

Answer 12

MU rises, increasing the ratio on the left

Question 13

If the price of an apple decreases from $5 to $4, what happens to your nominal income and does your PP increase or decrease?

Answer 13

Nominal stays the same, increase

Question 14

What is the substitution effect?

Answer 14

The good that now has a lower price becomes more attractive

Question 15

What is the income effect?

Answer 15

If the price of the good is lower, the consumer becomes richer and can keep more income

Question 16

When price decreases, substitution effect says to buy _

Answer 16

More

Question 17

When price decreases, purchasing power (inc/dec)

Answer 17

Increases

Question 18

If substitution effect > income effect

Answer 18

Buy more

Question 19

If substitution effect < income effect

Answer 19

Buy less

Question 20

When price decreases, income effect says to buy _ (if normal) and _ (if inferior)

Answer 20

More, less

Question 21

Differentiate both effects on normal, inferior and giffen (inferior)

Answer 21

Normal: both effects work in same direction
Inferior: IE partially offsets SE
Giffen: IE dominates SE

Question 22

What is special about the curve of a giffen good?

Answer 22

Upward sloping D curve

Question 23

When wage increases and leisure is a normal good, what does substitution effect say?

Answer 23

The opp. cost of leisure increases and becomes less attractive
Work more, less leisure

Question 24

When wage increases and leisure is a normal good, what does income effect say?

Answer 24

Work less, more leisure

Question 25

Give an example of the paradox of value

Answer 25

Essential: cheap water

Non-essential: expensive diamonds

Question 26

Water has a _ price, a _ marginal value, and a _ total value

Answer 26

Low, low, high

Question 27

Diamonds have a _ price, a _ marginal value, and a _ total value

Answer 27

High, high, low

Question 28

Water has a (small/large) consumer surplus

Answer 28

Large

Question 29

Diamonds have a (small/large) consumer surplus

Answer 29

Small

Question 30

If the price of movies increases, MU of movies will _

Answer 30

Increase