Section 5

Question 1

Utility

Answer 1

A measure of satisfaction you get form consuming a product

1. utility & usefulness are not synonymous
2. Utility is subjective
3. Difficult to quantify

Question 2

Law of Diminishing Marginal Utility

Answer 2

Added satisfaction declines as a consumer acquires additional units of a product

Question 3

Marginal Utility

Answer 3

Satisfaction gained from each additional unit

Question 4

Total Utility

Answer 4

Total amount of satisfaction gained from consuming multiple units

Sum of all marginal utility

Question 5

Ordinal

Answer 5

Values defined by ranking of preference

Used to make interpersonal comparisons of utilities

Question 6

Cardinal

Answer 6

Units of specific measurements like inches or feet, specific numbers

Question 7

Consumer Choice

Answer 7

1. Rational behavior: want greatest utility
2. Preferences: each has their own utility ranking
3. Budget constraint: fixed income
4. Prices: everything has a price and you have limited income

Question 8

Utility Maximizing Rule

Answer 8

Spend money so that each dollar spent maximizes their utility for each purpose

Question 9

Consumer Equilibrium

Answer 9

When a consumer has maximized his utility

Once achieved the consumer will not alter his spending

Question 10

Marginal Utility per Dollar

Answer 10

MU / Cost

Question 11

Decision Rule for Utility Maximization

Answer 11

Purpose items that give the greatest marginal utility per dollar

Question 12

Income Effect

Answer 12

Impact that a price change has on a consumers real income and the demand for a good.

Question 13

Substitution Effect

Answer 13

Impact that a price change has on its quantity demanded

Question 14

Value of Time

Answer 14

Consumption and production of time. With time taken in account less expensive could be more expensive

Question 15

Behavioral Economics

Answer 15

How people deal with negative possibilities

Question 16

Prospect Theory

Answer 16

How consumers plan for and deal with ups and downs

1. People judge good and bad based on status quo
2. Experience diminishing marginal utility for gains and losses
3. Loss adverse: losses are felt 2.5 times more intense

Question 17

Framing Effects

Answer 17

Change in preferences caused by new information that alters the perception of gains and losses

Question 18

Anchoring

Answer 18

Setting a tone in order to lead people unconsciously to later their evaluation

Question 19

Mental Accounting

Answer 19

Put certain options into separate mental accounts and don’t consider them when making a decision

Question 20

Endowment Effect

Answer 20

People put higher valuation on things they posses

Question 21

Ordinal Utility Ranking

Answer 21

AKA - Indifference curve analysis

1. Budget lines
2. Indifference curve

Question 22

Budget Line

Answer 22

AKA - Budget Constraint

Curve showing all combinations of two products that can be purchases with certain amount of money.
Value of slope is Px/Py

1. Income change: increase in income shifts right
2. price change: decrease in price shifts right

Question 23

Indifference Curves

Answer 23

Combination of two products that will yield total satisfaction - independent of price

1. Normal goods: downsloping curve (hats and snickers)
2. Perfect substitutes: linear downsloping (red and blue m&m’s)
3. Perfect compliments: right angle (left and right shoes)

Question 24

MRS

Answer 24

Marginal Rate of Substitution

Measurement of the slope of an indifference curve and the rate at which you will give up one good for another

Must substitute one good for another for maximum utility

As one increases the other decreases (concurve downslope)

Question 25

Equilibrium Position

Answer 25

AKA - Utility Maximizing Combination

MBS = MUx/MUy = Px/Py

Where budget line meets the highest indifference curve

Question 26

Derivation of Demand Curve

Answer 26

Get equilibrium position of one price: Get equilibrium position of another price (change 1 product only): The two positions give you points to create demand curve