Understanding People's Choices

Question 1

characteristics of a good model

Answer 1

clear, useful, improves communication, predicts accurately

Question 2

using an economic model

Answer 2

1) build
2) use
3) experiment

Question 3

indifference curve

Answer 3

curve which indicates the combinations of goods that provide the same level of utility (satisfaction)

Question 4

slope of indifference curve

Answer 4

the number of product A you are willing to give up in order to get one extra unit of product B

Question 5

equilibrium

Answer 5

self-perpetuating situation

Question 6

ceteris paribus

Answer 6

‘holding other things constant’

Question 7

incentives

Answer 7

people are attempting to do as well as they can

Question 8

economic rent

Answer 8

= benefit from option taken - benefit from next best option

Question 9

opportunity cost

Answer 9

doing A means forgoing the opportunity to do B, so ‘not doing B’ becomes part of the cost of doing A

Question 10

feasible frontier

Answer 10

curve illustrating maximum possible output combinations of two goods that can be produced

Question 11

marginal rate of substitution

Answer 11

rate at which a consumer is willing to give up one good in exchange for another good while maintaining the same level of utility (slope of the indifference curve)

Question 12

marginal rate of transformation

Answer 12

rate at which one good can be transformed into another good in production

Question 13

income effect

Answer 13

effect of additional (unearned) income on the choice of free time (budget constraint shifts)

Question 14

substitution effect

Answer 14

effect of the change in the opportunity cost, given the new level of utility (MRT shift)