Chapter 10

Question 1

Behavioral economics

Answer 1

The study of situations in which people make choices that do not appear to be economically rational.

Question 2

Budget constraint

Answer 2

The limited amount of income available to consumers to spend on goods and services

Question 3

Endowment effect

Answer 3

The tendency of people to be unwilling to sell a good they already own even if they are offered a price that is greater than the price they would be willing to pay to buy the good if they didn’t already own it.

Question 4

Income effect

Answer 4

The change in the quantity demanded of a good that results from the effect of a change in price on consumer purchasing power, holding all other factors constant.

Question 5

Law of diminishing marginal utility

Answer 5

The principle that consumers experience diminishing additional satisfaction as they consume more a good or service during a given period of time.

Question 6

Marginal utility (MU)

Answer 6

The change in total utility a person receives from consuming one additional unit of a good or service.

Question 7

Network externality

Answer 7

A situation in which the usefulness of a product increases with the number of consumers who use it.

Question 8

Opportunity cost

Answer 8

The highest-valued alternative that must be give up to engage in an activity.

Question 9

Substitution effect

Answer 9

The change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods, holding constant the effect of the price change on consumer purchasing power.

Question 10

Sunk cost

Answer 10

A cost that has already been paid and cannot be recovered

Question 11

Utility

Answer 11

The enjoyment or satisfaction people receive from consuming goods and services.