Chapter 5

The benefits obtained from the goods and services that consumers consume are called _______

Utility

A corner solution occurs when the utility maximizing solution

includes only the purchase of one of the two goods.

An increase in income

increases the ability to buy both goods, shifting the budget line out.

A decrease in the price of Y

increases the ability to buy good Y, rotating the line out on the Y-axis.

If MUX/PX > MUY/PY, the consumer should

Buy more X and less Y

The consumer chooses the bundle of goods that maximizes his utility and spends all his income. Which of the following statements is correct?

The addition to utility of the last unit of the good per dollar spent on the good is equal across all goods.

If Ferdinand prefers a Big Mac to a Whopper and a Whopper to a hotdog, but is indifferent between a Big Mac and a Quarter Pounder he must

prefer a Quarter Pounder to a hotdog.

An individual's demand curve for X

shows how the utility-maximizing choice of X changes as the price of X changes.

The rate at which a consumer is willing to substitute one good for another is measured by the

slope of the line tangent to the indifference curve.

To derive the ________, add the quantities demanded by each consumer in the market at each given price level.

Market demand curve

On an indifference map, higher indifference curves indicate

higher utility

Consumers seek to maximize

Satisification

The marginal rate of substitution is calculated as

the slope of the indifference curve

Select all that apply Utility maximization requires that the slope of the indifference curve is the same as the slope of the budget line. the marginal rate of substitution is equal to the ratio of the prices. all income is spent. some income is saved. the marginal rate of substitution is greater than the ratio of the prices.

the slope of the indifference curve is the same as the slope of the budget line. the marginal rate of substitution is equal to the ratio of the prices. all income is spent.

Select all that apply The slope of the budget line (- PX/PY) is positively sloped to reflect that each good has a positive price. is the ratio of the marginal utilities. represents how much of good Y must be given up to afford to purchase good X. is negative because you must give up some of one good to be able to purchase more of the other, given limited income.

(- PX/PY) represents how much of good Y must be given up to afford to purchase good X. is negative because you must give up some of one good to be able to purchase more of the other, given limited income.

If there are three consumers in a market and consumer A demanded 3 units at a price of $5, consumer B demanded 2 units at a price of $5, and consumer C demanded 6 units at a price of $5, then the market quantity demanded is _______ unit(s).

11

Economists always assume that more of a good is ______ less of a good.

Better than

Which of the following assumptions is (are) NOT made in consumer behavior theory?

Consumers can measure the utility they get from all bundles of goods.

Which of the following assumptions is(are) NOT made in consumer behavior theory?

Consumers can measure the utility they get from all bundles of goods.

A(n) _______ is a specific combination of goods or services from which consumers derive satisfaction.

Consumption bundle

True or false: If a consumer's preferences are not transitive, the consumer will always be able to choose between bundles.

False

True or false: The consumer's utility maximization problem is one of the few unconstrained maximization problems in economics.

False

A(n) ______ is set of points representing different combinations of goods and services, each of which provides the same level of utility as the others.

Indifference curve

The marginal rate of substitution can be calculated as

MRS = - ΔY/ΔX or MRS = - MUX/MUY

When utility is maximized

MUX/PX = MUY/PY

Select all that apply Which of the following (is)are true of utility? Utility is not easily measured Utility units are sometimes called "units of utility" or "utils". Utility is the same as usefulness. Utility can be represented by the equation U=f(X, Y).

Utility is not easily measured Utility units are sometimes called "units of utility" or "utils". Utility can be represented by the equation U=f(X, Y).

The equation for the budget line is

Y = M/PY - PX/PY x X

A corner solution occurs

at the endpoint of a budget line.

What happens to the budget line when the price of X increases? price of X decreases?

budget line rotates in on the X-axis and stays the same on the Y-axis budget line rotates out on the X-axis and stays the same on the Y-axis

What happens to the budget line when the price of Y increases? price of Y decreases?

budget line rotates in on the Y-axis and stays the same on the X-axis budget line rotates out on the Y-axis and stays the same on the X-axis

If preferences are transitive, when bundle A is preferred to bundle B and bundle B is preferred to bundle C, then

bundle A is preferred to bundle C

Marginal utility is the

change in total utility that results from increasing the amount of a good consumed by one unit.

When a consumer's preferences are ______, the consumer can rank all conceivable bundles of commodities.

complete

As the price of a good increases, the utility maximizing problem shows that the quantity of the good demanded will

decrease

The individual demand for a good is derived from the utility maximizing problem

for each of several prices

A(n) _______ is made up of two or more ______ that show different levels of utility for a consumer.

indifference map; indifference curve

Lord Greystroke uses his limited income to purchase fruits and nuts; he is currently buying 10 pounds of fruits at a price of $2 per pound and 5 pounds of nuts at a price of $6 per pound. The last pound of fruits added 10 units to Lord Greystroke's total utility, while the last pound of nuts added 30 units. Lord Greystroke

is making the utility-maximizing choice.

Market demand

is the horizontal summation of the individual demand curves. slopes downward. shows how market purchases vary with price.

The slope of an indifference curve

is the rate at which the consumer is willing to exchange one good for another, utility held constant.

Marginal utility is

the change in utility that results from increasing the amount of a good consumed by one unit.

Along an indifference curve

consumer utility is constant

What happens to the budget line when income increases? when income decreases?

Budget line shifts out Budget line shifts in

The marginal rate of substitution diminishes as one moves down the indifference curve because as more of good Y is taken away, ______ of good X must be given to the consumer to keep her equally satisfied.

More

_____ means consumers prefer bundle A to bundle B, prefer bundle B to bundle A, or are indifferent between bundle A and B.

Ranking bundles

Select all that apply When graphed, indifference curves are downward sloping. are upward sloping. are convex. are concave.

are downward sloping. are convex.