Ch 5: Demand

When Kim drinks 1 cup of coffee per day her total utility is 10, when she drinks 2 cups her total utility is 14, and when she drinks 3 cups her total utility is 16. Thus, her MARGINAL UTILITY from consuming coffee is ....

DECREASING! her marginal utility of going from 2 to 3 cups a day is only 2, while her marginal utility of going from 1 to 2 cups is 4.

T OR F: economists believe that our preferences for different goods and services are not shaped by our biological needs

FALSE

T OR F: If your marginal utility from watching a second hour of tv is less than your marginal utility from the first hour, then watching a second hour of tv will decrease your total utility

FALSE; your marg utility from watching a second hr can still be positive even if its less than your marg utility from watching the first hr

An ___ traces out the set consumption bundles that a soncumer likes equally well.

Indifference Curve

The price equals marginal cost rule for profit maximization is a specific example of which core principle?

The Cost-Benefit Principle

A bundle of goods refers to ...

a parcticular combo of goods

A parallel shift outward in the budget constraint is consistent with

an increase in income

An indifference curve traces out all of the consumption bundles that a consumer...

likes equally well

the absolute value of the slope of an indifference curve is called...

marginal rate of subsititution

The number written on a price tag is a good's ____.

nominal price

Law of Demand

people do less of what they want to do as the cost of doing it rises

Economists use the concept of utility to...

represent the satisfaction people derive from their consumption activities

When the price of a good falls, marginal utility per dollar spent on that good ______, prompting consumers to purchase ______ of that good.

rises; more

rational spending rule

spending should be allocated across goods so that the marginal utility per dollar is the same for each good

You are trying to decide how to spend your last lunch dollar. You should use that dollar to buy more of the item:

that gives you the highest marginal utility per dollar.

nominal price

the absolute price of a good in dollar terms

the nominal price of a good is

the absolute price of the good in dollar terms

marginal utility

the additional utility gained from consuming an additional unit of a good

optimal combination of goods

the affordable combination that yields the highest total utility

Utility Maximization

the assumption is that peope try to allocate their incomes so as to maximize their satisfaction

consumer surplus

the difference between a buyer's reservation price for a product and the price actually paid

real price

the dollar price of a good relative to the average dollar of all other goods

Suppose that in response to an increase in the price of sugar, people buy less sugar because they can afford less of everything. This is an example of ____ of a price change.

the income effect

When more firms enter an industry:

the industry supply curve will shift right.

a budget constraint

the limit on the consumption bundles that a consumer can afford; the line that describes the set of all bundles a consumer can purchase given the consumer's income and prices

law of diminishing marginal utility

the tendency for the additional utility gained from consuming an additional unit of a good to diminish as consumption increases beyond some point

total utility

the total amount of satisfaction obtained from consumption of a good or service

Total consumer surplus in a market is...

the total amount that conusmers would be willing to pay, in aggregate, for the right to participate in that market

When the price of a good/service goes up, rational consumers generally ....

turn to less expensive substitutes