Chapters 16, 17, & 19

Question 1

consumer optimum

Answer 1

combination of goods and services that maximizes consumer’s utility for a given income or budget

Question 2

diamond-water paradox

Answer 2

explains why water (essential to life) is expensive while diamonds (do not sustain life) are expensive

Question 3

diminishing marginal utility

Answer 3

occurs when marginal utility declines as consumption increases

Question 4

marginal utility

Answer 4

additional satisfaction derived from consuming one more unit of a good or service

Question 5

real-income effect

Answer 5

occurs when there is a change in purchasing power as result of change in price of good

Question 6

substitution effect

Answer 6

occurs when consumer substitute a product that has become relatively less expensive as the result of a price change

Question 7

util

Answer 7

personal unit of satisfaction used to measure the enjoyment from consumption of a good or service

Question 8

utility

Answer 8

measure of the level of satisfaction that a consumer enjoys from the consumption of goods and services

Question 9

indifference curve

Answer 9

represents the various combinations of two goods that yield the same level of personal satisfaction, or utility

Question 10

maximization point

Answer 10

point at which a certain combination of two goods yields the most utility

Question 11

budget constraint

Answer 11

set of consumption bundles that represent the maximum amount the consumer can afford

Question 12

marginal rate of substitution (MRS)

Answer 12

rate at which a consumer is willing to trade one good for another along an indifference curve

Question 13

perfect substitutes

Answer 13

exist when the consumer is completely indifferent between two goods, resulting in a straight-line indifference curve with a constant marginal rate of substitution

Question 14

perfect complements

Answer 14

exist when the consumer is interested in consuming two goods in fixed proportions, resulting in a right-angle indifference curve

Question 15

behavioral economics

Answer 15

field of economics that draws on insights from experimental psychology to explore how people make economic decisions

Question 16

bounded rationality

limited reasoning

Answer 16

proposes that although decision-makers want a good outcome, either they are not capable of performing the problem solving that traditional economic theory assumes or they are not inclined to do so

Question 17

gambler’s fallacy

Answer 17

belief that recent outcomes are unlikely to be repeated and that outcomes that have not occurred recently are due to happen soon

Question 18

hot hand fallacy

Answer 18

belief that random sequences exhibit a positive correlation (relationship)

Question 19

framing effect

Answer 19

occurs when people change their answer depending on how the question is asked (or change their decision depending on how alternatives are presented

Question 20

priming effect

Answer 20

occurs when the order of the questions influences the answers

Question 21

status quo bias

Answer 21

exists when decision-makers want to maintain their current choices

Question 22

intertemporal decision-making

Answer 22

involves planning to do something over a period of time, which requires valuing the present and the future consistently

Question 23

ultimatum game

Answer 23

economic experiment in which two players decide how to divide a sum of money

Question 24

Risk-average people

Answer 24

prefer a sure thing over a gamble with a higher expected value

Question 25

Risk-neutral people

Answer 25

choose the highest expected value regardless of the risk

Question 26

Risk-takers

Answer 26

prefer gambles with lower expected values, and potentially higher winnings, over a sure thing.

Question 27

Prospect theory

Answer 27

suggests that individuals weigh the utilities and risks of gains and losses differently

Question 28

net exports

Answer 28

total exports of final goods and services minus total imports of final goods and services

Question 29

trade balance

Answer 29

difference between its totaldeficit exports and total imports

Question 30

trade surplus

Answer 30

occurs when exports exceed imports, indicating a positive trade balance

Question 31

trade deficit

Answer 31

occurs when imports exceed exports, indicating a negative trade balance

Question 32

comparative advantage

Answer 32

refers to the situation where an individual, business, or country can produce at a lower opportunity cost than a competitor can

Question 33

Protectionism

Answer 33

blanket term for government actions and policies that restrict or restrain international trade, often with the intent of protecting local businesses and jobs from foreign competition

Question 34

Tariffs

Answer 34

taxes levied on imported goods and services

Question 35

import quotas

Answer 35

limits on the quantity of products that can be imported into a country

Question 36

infant industry argument

Answer 36

states that domestic industries need trade protection until they are established and able to compete internationally

Question 37

Dumping

Answer 37

occurs when a foreign supplier sells a good below the price it charges in its home country