Chapter 9: Possibilities, Preferences, and Choices

Question 1

Budget line

Answer 1

Limit to a household’s consumption choices. It marks the boundary between those combinations of goods and services that a household can afford to buy and those that it cannot afford.

Question 2

Diminishing marginal rate of substitution

Answer 2

General tendency for a person to be willing to give up less of good y to get one more unit of good x, while at the same time remaining indifferent as the quantity of good x increases.

Question 3

Income effect

Answer 3

Effect of a change in income on buying plans, other things remaining the same.

Question 4

Indifference curve

Answer 4

Line that shows combinations of goods among which a consumer is indifferent.

Question 5

Marginal rate of substitution

Answer 5

Rate at which a person will give up good y (the good measured on the y-axis) to get an additional unit of good x (the good measured on the x-axis) while at the same time remaining indifferent (remaining on the same indifference curve) as the quantity of x increases.

Question 6

Price effect

Answer 6

Effect of a change in the price of a good on the quantity of the good consumed, other things remaining the same.

Question 7

Real income

Answer 7

Household’s income expressed as a quantity of goods that the household can afford to buy.

Question 8

Relative price

Answer 8

Ratio of the price of one good or service to the price of another good or service. A relative price is an opportunity cost.

Question 9

Substitution effect

Answer 9

Effect of a change in price of a good or service on the quantity bought when the consumer (hypothetically) remains indifferent between the original and the new consumption situations—that is, the consumer remains on the same indifference curve.