ECON201 Chapter 7
indifference curve
A curve showing the different combinations of two products that yield the same satisfaction or utility to a consumer.
Review 7.3
A downward sloping demand curve can be derived by changing the price of one product in the consumer-behavior model and noting the change in the utility-maximizing quantity of that product demanded.
budget line
A line that shows the different combinations of two products a consumer can purchase with a specific money income, given the products' prices.
indifference map
A set of indifference curves, each representing a different level of utility, that together show the preferences of a consumer.
The iPad disrupted consumer equilibrium because consumers concluded en masse that iPads had a marginal-utility-to-price ratio (MU/P) that was ______ the ratios for other products.
higher than Reason: Consumers shifted spending away from other alternative products and towards iPads as a way to increase total utility. Hence, the higher ratio to other products.
If successive units of a good yield smaller and smaller amounts of marginal utility then the consumer will buy additional units of a product only if its price ______.
falls
substitution effect
(1) A change in the quantity demanded of a consumer good that results from a change in its relative expensiveness caused by a change in the good's own price. (2) The reduction in the quantity demanded of the second of a pair of substitute resources that occurs when the price of the first resource falls and causes firms that employ both resources to switch to using more of the first resource (whose price has fallen) and less of the second resource (whose price has remained the same).
Review 7.2
A consumer maximizes utility by allocation income so that the marginal utility per dollar spent is the same for every good purchased.
income effect
A change in the quantity demanded of a product that results from the change in real income (purchasing power) caused by a change in the product's price.
Which of the following does total utility refer to?
Amount of satisfaction a person gets from a good or service
law of diminishing marginal utility
The principle that as a consumer increases the consumption of a good or service, the marginal utility obtained from each additional unit of the good or service decreases.
Which of the following best describes how a consumer's demand schedule or curve can be derived?
By considering alternative prices at which a good or service might be sold and then determining the quantity a consumer will purchase
Which of the following best describes consumer choice in relation to preferences for goods and services?
Consumers have a good idea of how much marginal utility they will get from successive units of various products they might purchase. Reason: Keep in mind that utility or satisfaction from successive or "additional" units is measured in terms of marginal utility, not total utility.
Review 7.1
Diminishing marginal utility provides a simple rationale for the law of demand
rational behavior
Human behavior based on comparison of marginal costs and marginal benefits; behavior designed to maximize total utility. See rational.
consumer equilibrium
In marginal utility theory, the combination of goods purchased that maximizes total utility by applying the utility-maximizing rule.
equilibrium position
In the indifference curve model, the combination of two goods at which a consumer maximizes his or her utility (reaches the highest attainable indifference curve), given a limited amount to spend (a budget constraint).
A family that does not own a refrigerator likely has a strong desire for one, whereas a family with two refrigerators likely has a much-reduced desire for a third. Which of the following best explains this decrease in desire?
Law of diminishing marginal utility
According the utility-maximizing rule, consumers achieve the greatest amount of satisfaction by doing which of the following?
Purchasing a combination of goods or services whereby the last dollar spent on each yields the same amount of marginal utility
When consumers seek to maximize their total utility, they are engaging in which of the following?
Rational behavior
marginal utility
The extra utility a consumer obtains from the consumption of 1 additional unit of a good or service; equal to the change in total utility divided by the change in the quantity consumed.
Which of the following explains why the demand curve for a given product is downward sloping?
The law of diminishing marginal utility
Review 7.1
The law of diminishing marginal utility indicates that gains in satisfaction become smaller as successive units of specific product are consumed.
budget constraint
The limit that the size of a consumer's income (and the prices that must be paid for goods and services) imposes on the ability of that consumer to obtain goods and services.
utility-maximizing rule
The principle that to obtain the greatest total utility, a consumer should allocate money income so that the last dollar spent on each good or service yields the same marginal utility (MU). For two goods X and Y, with prices Px and Py, total utility will be maximized by purchasing the amounts of X and Y such that MUx /Px = MUy /Py for the last dollar spent on each good.
marginal rate of substitution (MRS)
The rate at which a consumer is willing to substitute one good for another (from a given combination of goods) and remain equally satisfied (have the same total utility); equal to the slope of a consumer's indifference curve at each point on the curve.
Review 7.2
The theory of consumer behavior assumes that, with limited income and a set of product prices, consumers make rational choices on the basis of well-defined preferences.
utility
The want-satisfying power of a good or service; the satisfaction or pleasure a consumer obtains from the consumption of a good or service (or from the consumption of a collection of goods and services).
Which of the following best describes the meaning of the utility-maximizing rule?
To maximize satisfaction, consumers should allocate income so that the last dollar spent on each product yields the same marginal utility. Reason: Given some amount of income, the last dollar spent on each product consumed should yield maximum total utility, but it should yield it equally across all products.
The pleasure, satisfaction, or happiness obtained from consuming a good or service is known as
Utility
Review 7.1
Utility is the benefit of satisfaction a person receives from consuming a good or a service.
When people exchange a gift for a different item or for a cash refund, they are doing which of the following?
atempting to maximize their total utility
Review 7.3
by providing insights on the substitution and income effects of price decline, the utility maximization model helps explain why demand curves slope downward.
An individual's demand curve for a product shows how much of the product the individual will_________ at Various__________
consume Prices
People achieve ______ when they have "balanced their margins" according to the utility-maximizing rule.
consumer equilibrium
A consumer's choices are directly influenced by all of the following except ______.
costs of production Reason: Costs of production indirectly influence consumer choice.
The ______ is the impact that changes in the prices of goods and services have on consumers' real earnings.
income effect
The marginal utility (MU) of an additional unit of water consumed by a typical consumer is ______, and the MU of an additional unit of diamond purchased by a consumer is ______.
low; high Reason: Consumers respond to the very low price of water by using a great deal of it; whereas, relatively few diamonds are purchased because of their prohibitively high price.
The iPad disrupted consumer equilibrium because spending shifted from alternative products with a(n) ______ marginal-utility-to-price ratio to iPads as a way to increase total utility.
lower Reason: Recall that marginal utility means additional satisfaction. Therefore, additional utility increases the ratio for iPads versus alternative products.
Consumer choice is influenced not only by the ______ utility that extra units of a good will yield, but also by how much ______ must be given up to obtain extra units of the good.
marginal; income Reason: It is marginal utility because the question refers to "extra units of a good." Reason: Consumer choice is influenced by marginal utility (already stated) and by their income. Reason: Total utility and utility are redundant.
People would rather receive cash gifts over noncash gifts because ______.
noncash gifts may not match recipients' preferences and therefore not maximize total utility
The ______ is the impact that a change in a product's price has on its relative expensiveness.
substitution effect
Consumers are willing to pay a much lower price for water than for diamonds because ______.
the marginal utility of water is low while the marginal utility of diamonds is high Reason: Marginal utility (MU) or additional satisfaction gained from consuming additional units of some good is what determines price. If MU declines quickly as consumption increases, then price is low, such is the case with water. In the case of diamonds, satisfaction declines slowly, which is why diamonds are pricier.
Utility is defined as
the satisfaction or pleasure obtained by consumers from consuming a good or service.
Reginald buys a six-pack of soda. The amount of satisfaction he derives from his purchase is described in terms of ______.
total utility
Given the different combinations of goods and services a consumer can obtain within his or her budget, the ______ can determine the specific combination that will yield the most utility or satisfaction.
utility-maximizing rule