ch8

preferences

a description of a person's likes and dislikes and the intensity of those feelings

consumer equilibrium

a situation in which a consumer has allocated all his or her available income in the way that, given prices of goods and services, maximizes his or her total utility

neuroeconomics

the study of the activity of the human brain when a person makes an economic decision

diminishing marginal utility

the tendency for marginal utility to decrease as the quantity consumed of a good increases

total utility

the total benefit that a person gets from the consumption of all the different goods and services

True/false: a budget line shows the different combinations of goods and services a consumer can afford to buy.

true: a budget lines shows the limits to what a consumer can afford to purchase.

True/false: marginal utility measures the additional utility from consuming an additional unit of a good.

true: as this definition stresses, marginal utility is the extra utility from an extra unit of a good.

behavioral economics

a study of the ways in which limits on the human brain's ability to compute and implement rational decisions influences economic behavior - both the decisions that people make and the consequences of those decisions for the way markets work

True/false: neuroeconomics have discovered that humans never make rational choices.

false: decisions made in the prefrontal cortex can be considered rational.

True/false: economists assume that households choose their consumption to maximize their marginal utility per dollar from each good.

false: economists assume that households maximize their total utility.

True/false: marginal utility theory makes predictions that disagree with the law of demand.

false: marginal utility theory concludes that when the price of a good falls, consumers increase the quantity they consume, which is in accord with the law of demand.

True/false: marginal utility theory predicts that when the price of a good rises, a consumer buys more because the marginal utility from the good is larger.

false: marginal utility theory predicts that a price rise decreases the quantity demanded.

True/false: marginal utility theory shows that goods with high prices (such as diamonds) have high total utilities.

false: products with high prices must have high marginal utilities, not necessarily high total utilities.

True/false: as more of a good is consumed, diminishing marginal utility means that the total utility from the good diminishes.

false: the principle of diminishing marginal utility means that the marginal utility - not total utility - from additional units declines.

True/false: if the marginal utilities from consuming all goods are equal and the consumer is spending all of his or her income, the consumer is in equilibrium.

false: to be in equilibrium, the marginal utility per dollar, MU/P, must be equal.

utility

the benefit or satisfaction that a person gets from the consumption of goods and services

marginal utility

the change in total utility resulting from a one-unit increase in the quantity of a good consumed

budget line

the limit to a household's consumption choices; marks the boundary between those combinations of goods and services that a household can afford and those that it cannot afford

marginal utility per dollar

the marginal utility from a good that results from spending one more dollar on it; calculated as the marginal utility from the good divided by its price

True/false: if the marginal utility per dollar from a pizza exceeds the marginal utility per dollar from a taco, total utility rises by increasing consumption of pizza by a dollar and decreasing consumption of tacos by a dollar.

true: in this case, the gain in utility from consuming one dollar more of pizza exceeds the loss in utility from consuming one dollar less of tacos.

True/false: behavioral economists assert that bounded rationality sometimes makes it impossible to determine the rational choice.

true: the question is essentially the definition of "bounded rationality".

True/false: the marginal utility per dollar from a soda is MU/P where MU is the marginal utility from a soda and P is the price of a soda.

true: the question presents the definition of marginal utility per dollar.

True/false: a person is maximizing utility if the marginal utility per dollar is equal for all goods and the household is spending all its income.

true: these are the two conditions necessary for a household to maximize its utility.

True/false: marginal utility theory predicts that when Shaniq's income rises, her demand for normal goods increases.

true: when Shaniq's income increases, Shaniq rearranges her consumption to maximize her utility and she increases her consumption of normal goods.