Chapter 6

Question 1

Behavioral economics

Answer 1

A branch of economics that seeks to enrich the understanding of decision making by integrating the insights of Psychology , and by investigating how given dollar amounts can mean different things to individuals depending on the situation

Question 2

Budget constraint/ budget line

Answer 2

Shows the possible combinations of two goods that are affordable given a consumer’s limited income

Question 3

Consumer equilibrium

Answer 3

Point on the budget line where the consumer gets the most satisfaction; occurs when the ratio of prices of goods is equal to ratio of marginal utilities

Question 4

Diminishing marginal utility

Answer 4

Common pattern that each marginal unit of good consumed provides less of an addition to utility than previous unit

Question 5

Fungible

Answer 5

Idea that units of a good such as dollars , ounces of gold, or barrels of oil are capable of mutual substitution with each other and carry equal value to the individual

Question 6

Income effect

Answer 6

A higher price means that in effect , the buying power of income has been reduced even though actual income as not changed; Always happens simultaneously with substitution effect

Question 7

Marginal utility

Answer 7

The additional utility produced by one additional unit of consumption

Question 8

Marginal utility per dollar

Answer 8

The additional satisfaction gained from purchasing a good given product price; (marginal utility ÷ price)

Question 9

Substitution Effect

Answer 9

When a price changes consumers have an incentive to consume less of a good with a higher price and more of a good with the relatively lower price; This always happens simultaneously with an income effect

Question 10

Total utility

Answer 10

Satisfaction derived from consumer choices