ECON 101 - Chp 8 - Utility + Demand

Question 1

Define consumption choices

Answer 1

choices that you make as a buyer of goods and services

Question 2

what influences consumption choices?

Answer 2

1. consumption possibilities
2. preferences

Question 3

define consumption possibilities

Answer 3

all the goods + services you can afford to buy

Question 4

What limits our consumption possibilities?

Answer 4

1. limited by income
2. limited by price

Question 5

define the budget line

Answer 5

line that marks the boundary between those combinations of goods + services that a household can afford to buy and those it cannot afford

Question 6

what causes changes in consumption possibilities

Answer 6

1. change in income
2. change in price

Question 7

how does the change in income affect consumption possibilities (budget line)

Answer 7

shifts the budget line inwards or outwards, but the slope stays constant

Question 8

how does change in price affect consumption possibilities (budget line)

Answer 8

the slope of the budget line is changed.

Question 9

define preferences

Answer 9

one’s dislikes + likes

Question 10

define utility

Answer 10

benefit or satisfaction that a person gets from the consumption of goods + services

Question 11

define total utility

Answer 11

the total benefit that a person gets from the consumption of all the different foods + services

Question 12

what is total utility dependent on?

Answer 12

level of consumption

Question 13

define marginal utility

Answer 13

change in the total utility that results from a 1 unit increase in the quantity of the good consumed

Question 14

what’s positive marginal utility?

Answer 14

goods + services that people value/enjoy - total utility increases as

Question 15

can there be negative marginal utility or lower total utility?

Answer 15

yes - pollution, hard labour

Question 16

define the principle of diminishing marginal utility

Answer 16

tendency for marginal utility to decrease as the consumption of a good increases

Question 17

how do we find the utility-maximizing choice

Answer 17

find the point on the budget line that gives the consumer the maximum attainable utility (based on the consumer’s preferences)

find the maximum total utility from the just affordable combination

Question 18

define consumer equilibrium

Answer 18

situation in which a consumer has allocated all of their available income to maximize their total utility

Question 19

define marginal utility per dollar

Answer 19

the marginal utility from a good that results from spending one more dollar on it

Question 20

what are the conditions to the utility-maximizing rule

Answer 20

1. spend all the available income
2. equalize the marginal utility per dollar for all goods - means that total utility cannot be increased further (MUc/Pc = MUm/Pm)

Question 21

what’s the rule to follow for power of marginal analysis

Answer 21

if the marginal utility per dollar from good Y is larger than the Marginal utility from good X, get more of good Y

if marginal gain from an action exceeds marginal loss, take the action

Question 22

what’s the formula to find the marginal utility - in terms of good X and good Y

Answer 22

MUy = MUx * (Py/Px)

Question 23

what does the ratio Py/Px mean?

Answer 23

is the relative price of good y in terms of good x

Question 24

what’s the effect of a fall in the price of a good?

Answer 24

1. new just-affordable combinations
2. new marginal utility per dollar form the good
3. new point to equalize the marginal utilities per dollar
4. substitution + income effect in play - one can use the fall in price to buy more of another and one can afford more of a good that fell in price
5. increase in quantity demand
6. change in demand for another good (complement or substitute) (usually a shift leftward as they are seen as substitutes)?

Question 25

What’s the effect of a rise in price of a good?

Answer 25

1. new just-affordable combinations
2. new marginal utility per dollar form the good
3. new point to equalize the marginal utilities per dollar
4. income effect in play - one can afford less of a good that rose in price
5. decrease in quantity demand
6. change in demand for another good - no change in demand if quantity of the other good stays the same

Question 26

what’s the effect of a rise in income

Answer 26

with a larger income, the consumer always buys more of a normal good
- the demand curve shifts rightward
- new just-affordable combinations
- new marginal utility per dollar form the good
- new point to equalize the marginal utilities per dollar

Question 27

what’s the resolution of the paradox of value in terms of total utility and marginal utility?

Answer 27

when a good’s total utility is large but the marginal utility is small, the value of the good is diminished

when a good’s total utility is small but the marginal utility is high, the value of the good is high

Question 28

is the marginal utility per dollar for water and diamonds the same?

Answer 28

yes

Question 29

how is the value paradox resolved by the consumer surplus?

Answer 29

water is cheap, but brings a large consumer surplus

diamonds are expensive but bring a small consumer surplus

Question 30

what does the concept of utility help us make predictions on ____?

Answer 30

predictions about consumption choices

Question 31

marginal utility theory does not enable us to predict ______?

Answer 31

how buying plans change

Question 32

marginal utility theory enables us to understand _________?

Answer 32

why people buy more of a good or services when its price falls and why people buy more of most goods when their incomes increases + resolves the paradox value.

Question 33

define behavioural economics

Answer 33

studies the ways in which limits on the human brain’s ability to compute and implement rational decisions influence economic behaviour

Question 34

what does behaviour economics look for?

Answer 34

looks for anomalies (choices that do not seem to be rational

Question 35

what are the 3 impediments that prevent rational choice?

Answer 35

1. bounded rationality
2. bounded willpower
3. bounded self-interest

Question 36

define bounded rationality

Answer 36

rationality that is limited by the computing power of the human brain

when faced with uncertainty, people make decisions based on instinct, from others, or rules of thumbs rather than rational calculation

Question 37

define bounded willpower

Answer 37

the less-than-perfect willpower that prevents us from making a decision that we know, at the time of implementing the decision, we will later regret

Question 38

define bounded self-interest

Answer 38

limited self-interest that results in sometimes suppressing our own interest to help others

Question 39

what are the 2 main applications of behavioural economics? why?

Answer 39

1. finance - uncertainty is a key factor
2. savings - future is a key factor

Question 40

define the endowment effect

Answer 40

tendency for people to value something ore highly simply because they own it

Question 41

which behavioral effect goes against marginal utility

Answer 41

the endowment effect

Question 42

define neuroeconomics

Answer 42

study of the human brain when a person makes an economic decision

Question 43

what type of discipline is neuroeconomics

Answer 43

experimental discipline

Question 44

what observations have been made in neuroeconomics

Answer 44

1. some economic decision are in the prefrontal cortex (store memories, analyze data, anticipate the consequences of our actions)
2. some economics decision are in the hippocampus (store memories of anxiety and fear)

Question 45

what’s the objective of neureconomics

Answer 45

uses the ideas + tools of neurosciences to study the effects of economic events and choices in side the human brain