Econ 101 Chapter 8

Question 1

Consumption choices

Answer 1

The things that you can afford to buy and it comes down to two factors:
- Consumption possibilities (What a consumer can afford)
- Preferences (what they prefer)

Question 2

Consumer’s Budget Line

Answer 2

• Factors limited by income.

Question 3

What a budget line?

Answer 3

When a person spends all her income it limits her consumption possibilities.

• It’s a boundary between the combination in g/s that a household can afford/and what they cannot.
• On the graph line is what’s attainable/affordable, any points off is unaffordable.

Question 4

What’s the idea of changes in consumption possibilities in relation to the graph?

Answer 4

• Consumption possibilities change when income or prices change.
• If income rises the budget line becomes more outward but leaves slope unchanged.
• A change in price shifts the line

Question 5

Preferences?

Answer 5

The choices a person makes based on likes/dislikes

Question 6

Utility?

Answer 6

The benefit/satifaction a person gets from consumption of goods/services.

Question 7

Total utility

Answer 7

Total benefit a person gets from consumption of all different goods/services.

• Depends on level of consumption
• More consumption more utility
• Depends on person

Question 8

Marginal utility?

Answer 8

The change in total utility that results from a one-unit increase in the quantity of a good consumed.

Question 9

Why does the numbers appear midway?/What happens when more quantity consumed?

Answer 9

• The marginal utility numbers appear midway between the quantities of cola because it is the change in the quantity she buys from 1 to 2 cases that produces the marginal utility of 48 units.
• As the quantity consumed of a good increases, the marginal utility from it decreases. (*More consumed less they want)

Question 10

Diminishing marginal utility?

Answer 10

• As the quantity consumed of a good increases, the marginal utility from it decreases.
• We call this decrease in marginal utility as the quantity of the good consumed increases

Question 11

How does the total utility graph looks as it increases?

Answer 11

As more’s consumed the graph becomes more like an unhappy face because it’s increases from 0…

Question 12

The diminishing marginal utility

Answer 12

It looks like a happy face as more’s consumed because it’s decreasing

Question 13

Utility-Maximizing Choice?

Answer 13

The key assumption is that the household chooses the consumption possibility that
maximizes total utility.

They want to get the most out of their limited resources. (*Most benefit)

Question 14

What are the directions to find utility-maximizing choice?

Answer 14

Make a table:

1. Find the just-affordable combinations
2. Find the total utility for each just-affordable combination
3. The utility-maximizing combination is the consumer’s choice

Question 15

What is consumer equilibruim?

Answer 15

a situation in which a consumer has allocated all of his or her available income in the way that maximizes his or her total utility, given the prices of goods and services.

Question 16

How would we identify the highest total utility?

Answer 16

The highest total utility in combination of two goods focused on.

Question 17

What’s the idea of choosing the margin?

Answer 17

A more natural way of finding the consumer equilibrium is to use the idea of choices
made at the margin.

It’s based off of our choices made.

Question 18

Marginal utility per dollar?

Answer 18

Marginal utility is the increase in total utility that results from consuming one more unit of a good.

Marginal utility per dollar is the marginal utility from a good that results from spending one more dollar on it.

Question 19

Whats the equation for marginal utility per dollar?

Answer 19

Calling the marginal utility from movies MU M and the price of a movie PM, then the
marginal utility per dollar from movies is MU M /PM .

Calling the marginal utility of cola MU C and the price of cola P C , then the marginal utility
per dollar from cola is MU C /PC .

• By comparing MU M/PM and MU C/PC , we can determine whether Lisa has allocated
  her budget in the way that maximizes her total utility.

Question 20

What’s utility Maximizing rule?

Answer 20

A consumer’s total utility is maximized by following the rule:

1. Spend all the available income.
2. Equalize the marginal utility per dollar for all goods. (*Find where it becomes equal per dollar for both items)

Question 21

what does Spend all the available income indicate?

Answer 21

• More consumption brings utility only those choices that exhaust income can maximize utility. (Lisa spending $40)

Question 22

what does equalize the marginal per dollar mean?

Answer 22

• Put your more of your money towards the thing you like more but this rule is saying shift your money between the goods to give overall happiness. So equalize

Question 23

A fall in price of movie: *example what happens?

Answer 23

When the price of a good falls the quantity demanded of that good increases—the
demand curve slopes downward.

• For example, if the price of a movie falls, we know that MU M/PM rises, so before the
  consumer changes the quantities bought, MU M/PM > MU C/PC .
• To restore consumer equilibrium (maximum total utility), the consumer increases the
  movies seen to drive down the MU M and restore MU M/PM = MU C/PC.