Topic 6 Flashcards
define utility
the value or satisfaction from consumption
define consumption bundle
collection of all the goods and services consumed by that individual
define utility function
total utility generated by his or her consumption bundle
define marginal utility
change in utility from consuming an additional unit
diminishing marginal utility
each additional unit of a good adds less utility than the previous unit
what is a constraint that causes the consumer to consume or more or less of a good
budget is limited
a budget constraint require that the cost of a customers consumption bundle be no more than the consumers ______
income
A consumer’s consumption possibilities are the set of all consumption bundles that can be consumed given the consumer’s _______ and prevailing ______.
income, prices
A consumers _______ _____ shows the consumption bundles available to a consumer who spends all his or her income
budget line
define the optimal consumption bundle
the one that maximizes a consumers total utility given his or her budget constraint
define marginal utility per dollar
The marginal utility per dollar spent on a good or service is the additional utility from spending one more dollar on that good or service.
marginal utility per dollar declines as the quantity of that good is consumed rises, due to ___________
diminishing marginal utility
The general rule: compare the MU and the price for all goods, and then adjust your spending toward the goods that give you _______ marginal utility per dollar.
more
what is the optimal consumption rule
a consumer chooses a consumption bundle for which the marginal utility per dollar spent on all goods is the same
If price rises, the marginal utility per dollar spent on the good _____, and the consumer can increase his or her utility by buying _____ of this good and more of other goods
falls
less
define the substitution effect
change in the quantity consumed of that good as the consumer substitutes the good that has become relatively cheaper for the good that has become relatively more expensive
define the income effect
change in the quantity consumed of a good that results from a change in the consumers purchasing power due to the change in the price of the good
In the case of an inferior good, the income and substitution effects work in ________ directions
opposite
define a giffen good
a very rare inferior good for which the income effect outweighs the substitution effect and the demand curve slopes upward
when price increases, budget line shifts ______
inward
when price decreases, budget line shifts ______
outward
when income increases, budget line shifts _____, parallel
outward
when income decreases, budget line shifts ______, parallel
inward
