Chapter 10

Question 1

Utility

Answer 1

A measure of the satisfaction the consumer derives from consumption of goods and services

Question 2

Consumption bundle

Answer 2

A collection of all the goods and services a consumer consumes

Question 3

utility function

Answer 3

Gives the total utility generated by a consumer’s consumption bundle

Question 4

Util

Answer 4

a unit of utility

Question 5

Marginal utility

Answer 5

The change in total utility generated by consuming one additonal unit of a good or service

Question 6

Marginal utility curve

Answer 6

Shows how marginal utility depends on the quantity of a good or service consumed

Question 7

Principle of diminishing marginal utility

Answer 7

Says that each successive unit of a good or service consumed adds less to total utility than the previous unit

Question 8

Budget line

Answer 8

Shows the consumption bundles avaialable to a consumer who spends all of his income

Question 9

Marginal utility per dollar

Answer 9

The additionaly utility from spending one more dollar on that good or service

Question 10

Optimal consumption rule

Answer 10

When a consumer maximizes utility, the marginal utility per dollar spent must be the same for all goods and services in the consumption bundle

Question 11

bounded rationality

Answer 11

Individuals save time and effort by making decisions that are “good enough” rather than perfect

Question 12

Substitution effect

Answer 12

A change in the price of a good is the change in the quantity of that good consumed as the consumer substitutes the good that has become relatively cheaper in place of the good that has become more expensive.

Question 13

Real income

Answer 13

The amount of income adjusted to reflect its true purchasing power

Question 14

Income effect

Answer 14

A change in the price of a good is the change in the quantity of that good consumed that results from a change in the consumer’s purchasing power due to the change in the price of the good