Unit 4: Utility

Question 1

Budget constraint

Answer 1

The limit on the consumption bundles that a consumer can afford

Question 2

Indifference curve

Answer 2

A curve that shows consumption bundles that give the consumer the same level of satisfaction
Consumer is equally satisfied

Question 3

Marginal rate of substitution

Answer 3

The rate at which a consumer is willing to trade one good for another

Question 4

Diminishing marginal utility

Answer 4

At some point on the consumption pattern of a good, each additional unit consumed yields less additional utility

Question 5

Income effect

Answer 5

The change in consumption that results when a price change moves the consumer to a higher or lower indifference curve

Question 6

Substitution effect

Answer 6

The change in consumption that results when a price change moves from the consumer along a given indifference curve to a point with a new marginal rate of substitution

Question 7

Do all demand curves slope down?

Answer 7

No, there can be upwards sloping demand curves. A Giffen good cause the curve to slope upwards because they are inferior goods for which the income effect is stronger than the substitution effect