ch 9

Substitution effect

The change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods, holding constant the effect of the price change on consumer purchasing power.

Opportunity cost

The highest-valued alternative that must be given up to engage in an activity.

Marginal rate of substitution (MRS)

The slope of an indifference curve, which represents the rate at which a consumer would be willing to trade off one good for another.

If the world price for a good exceeds the before-trade domestic price for a good, then that country must have

a comparative advantage in the production of the good

When a country allows trade and exports a good,

domestic producers are better off, domestic consumers are worse off, and the nation is better off because the gains of the winners exceed the losses of the losers.

Which of the following statements about import quotas is true

. For every tariff, there is an import quota that could have generated a similar result.

Sunk cost

A cost that has already been paid and cannot be recovered

Which of the following is not employed as an argument in support of trade restrictions?

Free trade harms both domestic producers and domestic consumers and therefore reduces total surplus.

The following table shows the amount of output a worker can produce per hour in the United States and Canada. * united states ( 8 pens 4 pencils) * canada ( 8 pens 2 pencils) Which of the following statements about free trade between the United States and Canada is true?

The United States will export pencils, and Canada will export pens.

Income effect

The change in the quantity demanded of a good that results from the effect of a change in price on consumer purchasing power, holding all other factors constant.

Marginal utility (MU)

The change in total utility a person receives from consuming one additional unit of a good or service.

Utility

The enjoyment or satisfaction people receive from consuming goods and services.

Budget constraint

The limited amount of income available to consumers to spend on goods and services.

Law of diminishing marginal utility

The principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time.

Behavioral economics

The study of situations in which people make choices that do not appear to be economically rational.

Network externality

This situation where the usefulness of a product increases with the number of consumers who use it.

If free trade is allowed, a country will export a good if the world price is

above the before-trade domestic price of the good

The economic model of consumer behavior predicts that

consumers will choose to buy the combination of goods and services that makes them as well off as possible from among all the combinations that their budgets allow them to buy.

Suppose the world price is below the before-trade domestic price for a good. If a country allows free trade in this good,

consumers will gain and producers will lose

Which of the following statements about a tariff is true?

tariff increases producer surplus, decreases consumer surplus, increases revenue to the government, and reduces total surplus.

When politicians argue that outsourcing or offshoring of technical support to India by Dell Computer Corporation is harmful to the U.S. economy, they are employing which of the following arguments for restricting trade?

the jobs argument

Consumers commonly commit the following three mistakes when making decisions:

•They take into account monetary costs but ignore nonmonetary opportunity costs. •They fail to ignore sunk costs. •They are overly optimistic about their future behavior.