Chapter 8: Consumer Choices

Question 1

What are consumption choices?

Answer 1

The choices you make as a buyer of goods and services are influenced by many factors, which economists summarize as
- Consumption possibilities.
- Preferences.

Question 2

What are consumption possibilities?

Answer 2

Consumption possibilities are all the things that you can afford to buy.

Question 3

What does consumer’s budget line?

Answer 3

We’ll study the consumption possibilities of Lisa, who buys only two goods: movies and soda.
Consumption possibilities are limited by income, the price of a movie, and the price of soda.
When Lisa spends all of her income, she reaches the limits of her consumption possibilities.
Lisa’s budget line shows the limits of her consumption possibilities.

Question 4

What is the difference between preferences and total utility?

Answer 4

• Preferences the choice that Lisa makes depends on her preferences—her likes and dislikes.
  Her benefit or satisfaction from consuming a good or service is called utility.
• Total utility is the total benefit a person gets from the consumption of goods. Generally, more consumption gives more total utility.

Question 5

What is marginal utility?

Answer 5

• Marginal utility from good is the change in total utility that results from a unit increase in the quantity of the good consumed.
• As the quantity consumed of a good increase, the marginal utility from it decreases.
• We call this decrease in marginal utility as the quantity of the good consumed increases the principle of diminishing marginal utility.

Question 6

What is the utility-maximizing rule?

Answer 6

A consumer’s total utility is maximized by following the rule:
- Spend all available income.
- Equalize the marginal utility per dollar for all goods.