Ch 10

Question 1

How do you measure consumer satisfaction from each unit of good or service consumed?

Answer 1

Utility

Question 2

Utility

Answer 2

A measure of satisfaction an individual consumer derives from consumption of goods and services, in order to rank consumption bundles that generate different levels of utility to an rational consumer

Question 3

Consumption bundle

Answer 3

A collection of all the goods and services consumed by that individual

Question 4

Marginal utility

Answer 4

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

Question 5

Total utility increases at……

Answer 5

Decreasing rate

Question 6

What is the MU to maximize total utility

Answer 6

MU = 0

Question 7

Principle of diminishing marginal utility

Answer 7

The additional satisfaction a consumer gets from one more unit of a good or service decreases as the amount of that good consumed rises

Question 8

What are the 2 constraints to individual consumer behaviour

Answer 8

Income and prices of goods and services

Question 9

Total expenditures on various goods and services must be _______ to or _______ than total income

Answer 9

Less; equal

Question 10

Budget line

Answer 10

Shows all consumption bundles available to a consumer when the consumer spends all of his or her income

Question 11

How can affordable budgets be found

Answer 11

Any bundle lying inside and on the budget line

Question 12

What does the slope of the budget line measure

Answer 12

Relative price of good x in terms of good y

of good y sacrificed to consume good x

Question 13

Relative price

Answer 13

The price of a good expressed in terms of the another

Question 14

Real income

Answer 14

The amount of income adjusted to reflect its purchasing power, that measures how much of consumption can be made with the given money income

Question 15

With budget constraints, an optimal consumption bundle for an individual consumer must be made at……….

Answer 15

A point on the budget line

Question 16

Marginal utility per dollar spent

Answer 16

Is the additional utility gained from spending one more dollar on that good and service

Question 17

If n kind of goods and services are consumed under the budget constraint, consumers TU is maximized when which condition is satisfied?

Answer 17

MU1/P1 = MU2/P2 =…….= MUn/Pn

Question 18

Optimal consumption rule

Answer 18

When a consumer maximizes TU, the MU per dollar spent must be the same across every good or service in the consumption bundle

Question 19

When the price of good or service rises……..

Answer 19

MU doesn’t change, but it reduces the MU per dollar spent on that good or service

Question 20

Substitution effect

Answer 20

The change in The quantity of that good consumed as the consumer substitutes other goods that are now relatively more expensive, holding total utility constant

Question 21

Is substitution effect the main reason for the downward sloping demand curve

Answer 21

Yes only if consumption of a good accounts for a small share of consumers total spending

Question 22

Does the increasing price of rental housing make a family poorer or richer?

Answer 22

Poorer as purchasing power drops

Question 23

Income effect

Answer 23

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

Question 24

Total effect of price change in quantity demanded

Answer 24

It’s the combination of substitution and income effect this the shape of the demand curve depends on direction and strength of substitution and income effects

Question 25

The demand curve of a given good slopes upward because…….

Answer 25

It’s an inferior good in which the income effect outweighs the substitution effect

Question 26

Total effect of the increasing price on different types of goods demanded

Answer 26

Normal good- negative qty demanded with downward demand curve

Inferior good- negative qty demanded with downward demand curve

Giffen good- positive qty demanded with upward demand curve

Question 27

Veblen good

Answer 27

Sales rise as price rises because consumer believes high price signals high quality