Chapter 8 Flashcards
Define the goal of a consumer
to maximize our utility
Define a budget line
a line that defines our consumption possibilities given prices and income
Derive the equation of a consumer’s budget line given prices and income
Income = PxQx + PyQy
(Important, do the alegebra to put this in slope-intercept form)
Graph changes in the budget line as a result of changes in income or prices
Review Checkpoint 8.1
(Important)
Define and calculate marginal utility
incremental change in utility from increasing quantity by one unit; measured by the change in utility divided by the change in quantity
Determine the consumer equilibrium with equal marginal utilities per dollar spent
the utility-maximizing combination of goods where marginal utility per dollar spent is equal across all good
Derive consumer demand from changes in consumer equilibrium
Define the “paradox of value”
self-contradictory statements used in comparing the “value” of diamonds relative to water
Recognize “value” as a measure of total utility (total value) or marginal utility (marginal value)
The word “value” in this case doesn’t specify which kind of value or utility is relevant. In the first question asking whether diamonds or water is more valuable, we implicitly assume we’re talking about the importance of diamonds or water over our entire lifetimes and we (correctly) assign a higher total utility and value to water over the course of our lifetimes. The second question asking which one we would pay more for is really asking more about our marginal utility or marginal value. It is asking where one more diamond or one more cup of water generates more value or more utility for us. Assuming we aren’t dangerously dehydrated at the time, one more cup of water is likely to have less value to us than one more diamond.
Identify applications of the paradox of value
See Reality Check Box and the diamonds v water example
Define utility
the level of happiness, pleasure, or satisfaction associated with consuming a good or service
