Lecture 6 - Consumer Choice and Behavioral Economics

Question 1

What two things drive consumer behavior?

Answer 1

Willingness and ability

Question 2

Willingness

Answer 2

The utility one derives from consumption

Question 3

Ability

Answer 3

One’s budget constraint

Question 4

Budget Constraint

Answer 4

The amount of income a consumer has to spend on goods and services

Question 5

Utility

Answer 5

The enjoyment or satisfaction obtained from consuming a good or service

Question 6

Marginal Utility

Answer 6

The utility associated with consuming one more unit of a good or service

Question 7

Law of diminishing marginal utility

Answer 7

The principal that consumers experience diminishing additional satisfaction as they consume more of a good or service

Question 8

How is the law of diminishing marginal utility represented on a graph?

Answer 8

A curve that is steep out of the origin, and becomes more slowly rising as additional units are consumed

Question 9

Given unlimited resources, a consumer would consume goods and services up to what point?

Answer 9

Maximum total utility; Until the marginal utility of consumption is zero for every good and service

Question 10

Equal Marginal Benefit Principle

Answer 10

marginal utility per dollar being the same for all goods

Question 11

What are the three characteristics of an optimal consumption bundle?

Answer 11

1. A consumer chooses a bundle of goods to maximize utility subject to their budget constraints
2. The bundle satisfies the equal marginal benefit principle
3. The consumer exhausts their budget

Question 12

Income Effect

Answer 12

change in quantity demanded of a good or service that results from the effect of the change in price of that good or service on the consumer’s purchasing power

Question 13

Substitution Effect

Answer 13

change in quantity demanded of a good or service that results from the change in price making the good more or less expensive relative to other goods

Question 14

Network Externality

Answer 14

A situation where the usefulness of a product increases with the number of consumers who use it

Question 15

What are two examples of network externalities?

Answer 15

Facebook, Cell Phones

Question 16

Path Dependence

Answer 16

History matters in the allocation of resources

Question 17

Behavioral Economics

Answer 17

a branch of economics that combines the insights of psychology, sociology, and other social sciences with economic theory

Question 18

Three common mistakes made by consumers

Answer 18

1. Taking into account monetary costs, but ignoring nonmonetary opportunity costs
2. failing to ignore sunk costs
3. Being unrealistic about their own future behavior

Question 19

Endowment Effect

Answer 19

The tendency of people to place additional value on goods simply because they own them

Question 20

Sunk Cost

Answer 20

A cost that has already been paid, and cannot be recovered in any meaningful way