Chapter 10: Review questions
3.2 What are network externalities? For what types of products are network externalities likely to be important? What is path dependence?
-A situation in which the usefulness of a product increases with the number of consumers who use it. -Technology -The path along which the economy has developed in the past.
2.1 Explain how a downward-sloping demand curve results from consumers adjusting their consumption choices to changes in price.
-Because the lower prices are, the larger the demand for that product is. The higher price being higher up on the y-axis, and the quantity being on the x-axis.
3.1 In which of the following situations are social influences on consumer decision making likely to be greater: choosing a restaurant for dinner of choosing which brand of toothpaste to buy? Briefly explain.
-Choosing a restaurant for dinner, because the factors around choosing a restaurant are not only based on the food served, but also on the popularity of the restaurant.
4.2 Define behavioral economics. What are the three common mistakes that consumers often make? Give an example of each mistake.
-It is the study of situations in which people make choices that do not appear to be economically rational. -They consider monetary costs but ignore nonmonetary opportunity costs that don't involve explicitly spending money: Not selling a ticket that you only paid $400 for but costs $3,000 for the Super Bowl that someone is willing to buy for to full $3,000, making it a gain of $2,600. -They fail to ignore sunk costs: Still focusing on money that has been paid that is nonrecoverable, e.i. purchasing a prescription drug that you do not use; however, prescriptions paid for are nonrefundable, thus having to dispose of it in the amnesty bin without getting a refund. -They are unrealistic about their future behavior: Not working out today, saying you will tomorrow; however, knowing that is what you said yesterday.
2.2 How is the market demand curve derived from consumers' individual demand curves?
-It is the sum of the quantities demanded by each individual consumer at each price.
1.2 What is the definition of marginal utility? What is the law of diminishing marginal utility? Why is marginal utility more useful than total utility in consumer decision making?
-The change in total utility a person receives from consuming one additional unit of a good or service. -The principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time. -Because the marginal utility can also be negative, thus giving the consumer the ability to make a decision that is beneficial to them; whereas, the total utility is the utility as a whole, to include the initial utility, therefore, making it hard for the consumer to decide based off of this concept.
1.1 What is the economic definition of utility? Is it possible to measure utility?
-The enjoyment or satisfaction people receive from consuming goods or services. -No, because there is no way to know exactly how much someone enjoys or is satisfied with consuming a product.
4.1 What does it mean to be economically rational?
-When consumers and firms take actions that are appropriate to reach their goals, given the information available to them.
