Microeconomics Chapter 6: Consumer Choices

Of the following statements, which describes the main differences between behavioral economics and traditional economics?

Behavioral economics makes the assumption that decision makers often act irrationally.

Which of the statements is NOT true and is compatible with the properties of utility?

Brian gets 35 utils from eating one sandwich while Julia receives 45 utils from eating one sandwich. Therefore, Julia likes sandwich more than Brian.

Recently, Shandra purchased 5 movie DVDs and 12 three ring binders. What if the price of DVDs rose by $3 and the price of three ring binders declined by $2. With Shandra's income unchanged and prices for other goods remaining the same, what actions would Shandra most likely take?

Buy more binders and fewer DVDs.

Over the past decade consumer incomes have risen by 20%. During that same time consumption of public transport has decreased by 10%. Which of the following must be true?

Public transport is an inferior good.

Ralph rides the bus to work which is considered an inferior good/service. After Ralph got promoted and his salary has doubled, he starts to make changes. Based on what you have learned about changes in income and consumer choices, what will most likely happen to Ralph's use of public transportation?

Ralph would discontinue riding the bus and purchase a car.

Which of the following is an example of consumers failing to treat money as fungible?

Susan would rather overdraw her bank account and incur a large fee than deposit the money (the cash) she inherited.

Which of the following statements is true about total utility and consumer behavior?

Total utility will increase with each additional purchase, but at a decreasing rate.

Rick's enjoyment of soda follows the principle of diminishing marginal utility. He calculates his total utility after consuming the first soda at 10, second soda at 15, third soda at 20, and fourth soda at 19. By the fourth soda Rick starts to feel sick. When is Rick's marginal utility maximized?

When he consumes the first soda.

behavioral economics

a branch of economics that seeks to enrich the understanding of decision-making by integrating the insights of psychology and by investigating how given dollar amounts can mean different things to individuals depending on the situation

income effect

a higher price means that, in effect, the buying power of income has been reduced, even though actual income has not changed; always happens simultaneously with a substitution effect

Shandra likes to spend her entertainment budget on movies and DVDs. If the price of a movie increases then Shandra's spending on DVDs will

could either increase, decrease, or remain unchanged.

Suppose that Misty likes pizza and hotdogs. If her marginal utility per dollar from pizza is 6 and from hotdogs it is 5, Misty

could increase her total utility by buying more pizza and fewer hotdogs

Greg eats pizza every day of the week. The marginal utility of pizza will most likely ________ by the end of the week, and all else being equal, this demonstrates the law of ________.

decrease; diminishing marginal utility

A budget line for Ralph shows his consumption choices between hot dogs (on the vertical axis) and hamburgers (on the horizontal axis). If the price of hamburgers goes up, it

has no effect on Ralph's ability to buy hot dogs but decreases the number of hamburgers he can buy. His budget line therefore rotates inward as if on a hinge from the vertical axis.

George consumes only two goods, pizza and compact discs. Both are normal goods for George. Suppose the price of pizzas decreases. George's consumption of compact discs will

increase due to the income effect.

consumer equilibrium

point on the budget line where the consumer gets the most satisfaction; this occurs when the ratio of the prices of goods is equal to the ratio of the marginal utilities.

total utility

satisfaction derived from consumer choices

budget constraint (or budget line)

shows the possible combinations of two goods that are affordable given a consumer's limited income

marginal utility per dollar

the additional satisfaction gained from purchasing a good given the price of the product; MU/Price

marginal utility

the additional utility provided by one additional unit of consumption

diminishing marginal utility

the common pattern that each marginal unit of a good consumed provides less of an addition to utility than the previous unit

fungible

the idea that units of a good, such as dollars, ounces of gold, or barrels of oil are capable of mutual substitution with each other and carry equal value to the individual

The contrast between total utility and marginal utility is that

total utility is cumulative, and marginal utility is not.

The typical pattern revealed when consumers choose is that, as the consumption of a good increases,

total utility rises, but marginal utility falls.

Economists believe that

utility is personal and subjective.

substitution effect

when a price changes, consumers have an incentive to consume less of the good with a relatively higher price and more of the good with a relatively lower price; always happens simultaneously with an income effect