Consumer choice and demand decisions Key terms

Question 1

The budget constraint

Answer 1

describes the different bundles that the consumer can afford.

Question 2

The marginal rate of substitution

Answer 2

of meals for films is the quantity of films the consumer must sacrifice to increase the quantity of meals by one unit without changing total utility.

Question 3

diminishing marginal rate of substitution

Answer 3

Consumer tastes exhibit a diminishing marginal rate of substitution when, to hold utility constant, diminishing quantities of one good must be sacrificed to obtain successive equal increases in the quantity of the other good.

Question 4

An indifference curve

Answer 4

shows all the consumption bundles yielding a particular level of utility.

Question 5

the chosen bundle

Answer 5

Hence, the chosen bundle will be the point at which an indifference curve just touches the budget line. The budget line is a tangent to the indifference curve at this point.

Question 6

The income expansion path

Answer 6

shows how the chosen bundle of goods varies with consumer income levels

Question 7

The substitution effect

Answer 7

of a price change is the adjustment of demand to the relative price change alone.

Question 8

The income effect

Answer 8

of a price change is the adjustment of demand to the change in real income alone.

Question 9

The market demand curve

Answer 9

is the sum of the demand curves of all individuals in that market.

Question 10

A transfer

Answer 10

s a payment, usually by the government, for which no corresponding service is provided by the recipient

Question 11

A transfer in kind

Answer 11

is the gift of a good or service.