51: utility maximization

Question 1

utility

Answer 1

measure of personal satisfaction produced by consumption

Question 2

util

Answer 2

one unit of utility

Question 3

marginal utility

Answer 3

change in total utility generated by consuming one additional unit of that good

Question 4

marginal utility curve

Answer 4

shows how marginal utility depends on the quantity consumed

Question 5

principal of diminishing marginal utility

Answer 5

the additional satisfaction a consumer gets from one more unit of a good declines as the amount consumed increases

Question 6

budget constraint

Answer 6

limits the cost of a consumer’s consumption to no more than their income

Question 7

consumption possibilities

Answer 7

the set of all consumption bundles that are affordable, given the consumer’s budget constraint and prices

Question 8

budget line

Answer 8

curve showing all maximum consumption possibilities

Question 9

optimal consumption bundle

Answer 9

bundle that maximizes utility given a budget constraint

Question 10

marginal utility per dollar

Answer 10

additional utility from spending one more dollar on a good

Question 11

marginal utility per dollar equation

Answer 11

MUx / Px

Question 12

optimal consumption rule

Answer 12

in order to maximize utility, a consumer must equate the marginal utility per dollar on each good in the budle

Question 13

optimal consumption rule equation

Answer 13

MUx / Px = MUy / Py = …

Question 14

location of optimal consumption bundle

Answer 14

on the budget line where the marginal utility per dollar curves meet