Topic 2 - Utility

Question 1

What are consumption choices affected by?

Answer 1

1 = Consumption Possibilities
2 = Preferences

Question 2

What are consumption possibilities?

Answer 2

All the things you can afford to buy, and a consumer’s budget line shows what good combinations they can afford to purchase.

Question 3

How does income and price changes affect the budget line?

Answer 3

Increase in income = shifts budget line outward but doesn’t affect the slope

Increase/Decrease in price = alters the slope of the line

Question 4

What are preferences?

Answer 4

A description of likes and dislikes

Question 5

What is utility made up of?

Answer 5

1 = Total Utility
2 = Marginal Utility

Question 6

What is total utility?

Answer 6

The total benefit that a person gets from the consumption of all the different goods and services. This depends on the level of consumption, as more consumption = generally more utility.

Question 7

What is marginal utility?

Answer 7

The change in total utility that results from a one-unit increase in the quantity of a good consumed. It is +ve but diminishes as the quantity of a good consumed increases.

Question 8

What is the utility-maximising choice?

Answer 8

Combine the constraint on the budget, and the consumer’s preferences and find the point on the budget line that gives the consumer the max. attainable utility.

Question 9

What is consumer equilibrium?

Answer 9

When a consumer has allocated all of their available income in a way which maximises their total utility, given the prices of goods.

Question 10

What is the marginal utility per £?

Answer 10

The marginal utility from a good that results from spending one or more £ on it.

Question 11

How do we work out marginal utility per £?

Answer 11

Marginal Utility/Price of a single unit

Question 12

What is the utility-maximising rule?

Answer 12

1 = Spend all available income
2 = Equalize the marginal utility per dollar for all goods

Question 13

Why do we need to spend all available income?

Answer 13

As more consumption increases utility.

Question 14

Why should we equalise the marginal utility per dollar?

Answer 14

Move money from G1 to G2 if it increases the utility by more than it decreases the utility from G2. Buying more of G1 decreases marginal utility, and buying less of G2 increases its marginal utility, so gap between marginal utility per dollar decreases.

Question 15

What is consumer surplus?

Answer 15

The difference between the price that consumers pay and the price they are willing to pay.

Question 16

What is behavioural economics?

Answer 16

Studies the way in which limits on the human brain’s ability to compute and implement rational decisions influences economic behaviour.

Question 17

Which three characteristics prevent rational choices?

Answer 17

1 = Bounded Rationality (limited by computing part of brain)
2 = Bounded Willpower (Willpower stops us making decisions we will later regret)
3 = Bounded Self-Interest (Limited self-interest that results in suppressing our own interests to help others)

Question 18

What is the endowment effect?

Answer 18

Tendency for people to value something more highly because they own it.

Question 19

What is neuroeconomics?

Answer 19

The study of the activity of the brain, when a person makes an economic decision.