Chapter 2

Question 1

Theoretical Tools

Answer 1

The set of tools designed to understand the mechanics behind economic decision making.

Question 2

Empirical Tools

Answer 2

The set of tools designed to analyze data and answer questions raised by theoretical analysis.

Question 3

Utility Function

Answer 3

A mathematical function representing an individual’s set of preferences, which translates her well-being from different consumption bundles into units that can be compared in order to determine choice

Question 4

constrained utility maximization

Answer 4

The process of maximizing the well-being (utility) of an individual, subject to her resources (budget constraint).

Question 5

Models

Answer 5

Mathematical or graphical representations of reality.

Question 6

Indifference Curves

Answer 6

A graphical representation of all bundles of goods that make an individual equally well off. Because these bundles have equal utility, an individual is indifferent as to which bundle he consumes.

Question 7

What 2 rules to indifference curves follow?

Answer 7

1) consumers prefer a higher indifference curve

2) indifference curves are always downward sloping

Question 8

Marginal Utility

Answer 8

The additional increment to utility obtained by consuming an additional unit of a good.

Question 9

diminishing marginal utility

Answer 9

the consumption of each additional unit of a good makes an individual less happy than the consumption of the previous unit.

Question 10

marginal rate of substitution

MRS

Answer 10

The rate at which a consumer is willing to trade one good for another. The MRS is equal to the slope of the indifference curve, the rate at which the consumer will trade the good on the vertical axis for the good on the horizontal axis

Question 11

Budget Constraint

Answer 11

A mathematical representation of all the combinations of goods an individual can afford to buy if she spends her entire income.

Question 12

Opportunity Cost

Answer 12

The cost of any purchase is the next best alternative use of that money, or the forgone opportunity.

Question 13

substitution effect

Answer 13

Holding utility constant, a relative rise in the price of a good will always cause an individual to choose less of that good.

Question 14

Income Effect

Answer 14

A rise in the price of a good will typically cause an individual to choose less of all goods because her income can purchase less than before.

Question 15

Normal Good

Answer 15

Goods for which demand increases as income rises

Question 16

Inferior Good

Answer 16

Goods for which demand falls as income rises.

Question 17

Welfare Economics

Answer 17

The study of the determinants of well-being,

or welfare, in society.

Question 18

Demand Curve

Answer 18

A curve showing the quantity of a good demanded by individuals at each price

Question 19

Elasticity of Demand

Answer 19

The percentage change in the quantity demanded of a good caused by each 1% change in the price of that good.

Question 20

Supply Curve

Answer 20

A curve showing the quantity of a good that firms are willing to supply at each price.

Question 21

Marginal Productivity

Answer 21

The impact of a one unit change in any input, holding other inputs constant, on the firm’s output.

Question 22

Marginal Cost

Answer 22

The incremental cost to a firm of producing one more unit of a good.

Question 23

Profits

Answer 23

The difference between a firm’s revenues and costs, maximized when marginal revenues equal marginal costs.

Question 24

Market

Answer 24

The arena in which demanders and suppliers interact

Question 25

Market Equilibrium

Answer 25

The combination of price and quantity that satisfies both demand and supply, determined by the interaction of the supply and demand curves.

Question 26

Social Efficiency

Answer 26

represents the net gains to society from all trades that are made in a particular market, and it consists of two components: consumer and producer surplus.

Question 27

Consumer Surplus

Answer 27

The benefit that consumers derive from consuming a good, above and beyond the price they paid for the good.

Question 28

Producer Surplus

Answer 28

The benefit that producers derive from selling a good, above and beyond the cost of producing that good.

Question 29

Total Social Surplus (Social Efficiency)

Answer 29

The sum of consumer surplus and producer surplus.

Question 30

First Fundamental Theorem

of Welfare Economics

Answer 30

The competitive equilibrium, where

supply equals demand, maximizes social efficiency.

Question 31

deadweight loss

Answer 31

The reduction in social efficiency from preventing trades for which benefits exceed costs.

Question 32

Social Welfare

Answer 32

The level of well-being in society.

Question 33

Second Fundamental Theorem of Welfare Economics

Answer 33

Society can attain any efficient outcome by suitably redistributing resources among individuals and then allowing them to freely trade

Question 34

equity–efficiency trade-off

Answer 34

The choice society must make
between the total size of the
economic pie and its distribution among individuals.

Question 35

social welfare function (SWF)

Answer 35

A function that combines the utility functions of all individuals into an overall social utility function.

Question 36

commodity egalitarianism

Answer 36

The principle that society should ensure that individuals meet a set of basic needs, but that beyond that point income distribution is irrelevant.

Question 37

equality of opportunity

Answer 37

The principle that society should ensure that all individuals have equal opportunities for success but not focus on the outcomes of choices made.

Question 38

Non Station

Answer 38

More is Better-economist assume that more of a good is always better than less of a good