Module 7 Study Guide Flashcards
What is the principle of diminishing marginal utility? Explain this concept using your own example.
Eventually as we consume more and more, it’s going to bring us less marginal utility even though total utility still goes up as we consume more.
What is an indifference curve?
An indifference curve represents all the combinations of goods and services that a person is indifferent to (as in they’ll be equally satisfied with any choice on the curve)
What point on a graph represents the highest level of utility?
The highest indifference curve line
What is a budget constraint? What role does a consumer’s budget constraint play in their utility maximization decision?
The amount someone has to spend. The consumer is only able to make the choice with the highest utility maximization within the constraints of the consumer’s budget.
What is a marginal decision rule?
The marginal decision rule says that if an additional unit of an activity yields greater benefit than its cost, it should be pursued.
Use the substitution and income effects to explain consumers’ response to a price change.
The change in consumption of a good, resulting from the implicit change in income because of a price change, is called the income effect
The change in a consumer’s consumption of a good in response to an income-compensated price change is called the substitution effect.
An income-compensated price change is an imaginary exercise in which it is assumed that when the price of a good or service changes, the consumers’ incomes are adjusted so that they have just enough to purchase the original combination of goods and services at the new set of prices.
