ECON 1001 Chapter 5 Homework

utility maximization

Assumption that people try to allocate their incomes so as to maximize their satisfaction; rises at a diminishing rate with additional consumption.

Which of the following best illustrates the income effect of an increase in the price of peanut butter?

The change in the quantity of peanut butter demanded that results because of the reduction in purchasing power

The law of _____ states that people do less of what they want to do as cost of doing it rises.

demand

terms of wants

economists like to emphasize that once we have achieved

The additional utility gained from consuming an additional unit of a good is called its _____.

marginal utility

law of demand

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

According to the _____ spending rule, spending should be allocated across goods so that the marginal utility per good is the same for each good.

rational

rational spending rule

spending should be allocated across goods so that the marginal utility per dollar is the same for each good; MUc / Pc = MUv / Pv

marginal utility

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

A consumer's optimal combination of goods is _____.

the affordable combination that yields that highest total utility

optimal combination of goods

the affordable combination that yields the highest total utility

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

Economists use the term _____ to refer to the satisfaction that people derive from all of their consumption of activities.

utility

The process whereby people allocate their income between different goods and services in order to maximize their total satisfaction is known as _____.

utility maximization

Once people have achieved bare subsistence levels of consumption, economists emphasize that we can talk mainly in terms of people's _____.

wants

If you get 15 additional utils per dollar spent on gas and 3 additional utils per dollar spent on books then _____.

you should reallocate your spending away from books and toward gas.