ECO 202 Chapter 10
Refer to Table 10-2. If Keira maximizes her utility, how many units of each good should she buy?
3 cups of soup and 4 sandwiches
Refer to Table 10-2. Suppose Keira's income increases from $18 to $23 but prices have not changed. What is her utility maximizing bundle now?
4 cups of soup and 5 sandwiches
If a consumer receives 20 units of utility from consuming two candy bars, and 25 units of utility from consuming three candy bars, the marginal utility of the third candy bar is
5 utility units.
As a consumer consumes more and more of a product in a particular time period, eventually marginal utility
declines
Total utility is maximized in the consumption of two goods by
equating the marginal utility per dollar for each good consumed.
What is the endowment effect?
the tendency of people to be unwilling to sell something they already own even if they are offered a price that is greater than the price they would be willing to pay to buy the good if they didn't already own it.
Marginal utility is the
extra satisfaction received from consuming one more unit of a product.
An item has utility for a consumer if it
generates enjoyment or satisfaction.
Marginal utility can be
positive, negative, or zero.
A budget constraint
refers to the limited amount of income available to consumers to spend on goods and services.
Sunk costs
refers to the limited amount of income available to consumers to spend on goods and services.
In order to derive an individual's demand curve for salmon, we would observe what happens to the utility-maximizing bundle when we change
the price of the product and hold everything else constant.
If Valerie purchases ankle socks at $5 and gets 25 units of marginal utility from the last unit, and bandanas at $3 and gets 12 units of marginal utility from the last bandana purchased, she
wants to consume more ankle socks and fewer bandanas.
Behavioral economics refers to the study of situations
where consumers and firms do not appear to be making choices that are economically rational.
Consider a downward-sloping demand curve. When the price of a normal good increases, the income and substitution effects
work in the same direction to decrease quantity demanded.
Standard economic theory asserts that sunk costs are irrelevant in making economic decisions, yet studies conducted by behavioral economists reveal that sunk costs often affect economic decisions. Which of the following could explain this observation?
People measure the value of a good in terms of its purchase price.
The income effect due to a price decrease will result in an increase in the quantity demanded for
a normal good
Which of the following is a common mistake made by consumers?
being overly optimistic about their future behavior
We can derive the market demand curve for gold earrings
by adding horizontally the individual demand curves of each gold earring consumer.
Economists assume that the goal of consumers is to
make themselves as well off as possible.
The substitution effect of an increase in the price of peaches is
the change in the quantity demanded that results from a change in the price of peaches, making peaches more expensive relative to other goods, holding constant the effect of the price change on consumer purchasing power.
The income effect of an increase in the price of peaches is
the change in the quantity of peaches demanded that results from the effect of the change in price on consumer purchasing power, holding all other factors constant.
The law of diminishing marginal utility states that
the extra satisfaction from consuming a good decreases as more of a good is consumed, other things constant.
The substitution effect of an increase in the price of Raisin Bran refers to
the fact that the higher price of Raisin Bran relative to its substitutes, such as Cheerios, causes consumers to buy less Raisin Bran.
Refer to Figure 10-1. When the price of hoagies increases from $5.00 to $5.75, quantity demanded decreases from Q1 to Q0. This change in quantity demanded is due to
the income and substitution effects.