Midterm 1 Flashcards
(18 cards)
Total Utility:
The total amount of utils received from consuming a
particular good or service or a bundle of goods and services.
Marginal Utility (MU):
The extra utility or happiness that one derives
from consuming an additional unit of a good or service.
Law of Diminishing Marginal Utility:
For a typical good, our utility function is increasing at a decreasing rate while holding the consumption of all other goods constant (ceteris paribus). This means each additional unit of consumption adds smaller and smaller level of happiness
Satiation:
The highest level of utility that can be derived from consuming a particular good ceteris paribus. After Satiation, one derives either zero MU or negative MU from an extra unity of consumption of that good.
Marginal Rate of Substitution (MRS):
This is the absolute value of the slope of indifference curve
Substitutes:
Two goods or services that can replace each other and provide the same function for the consumer
Perfect substitutes:
Two goods that are effectively identical; however, two goods that
are always traded in the same ratio are also perfect substitutes.
Complements:
Two goods that are jointly consumed or consumed together.
Perfect complements:
Two goods that are consumed together in the same ratio all the time.
Consumer problem:
Maximize happiness through the choices of the number of goods and services to purchase subject to the fact that the consumer has limited resources or a budget (limited money)
When Joshua’s income increases, he purchases more prime-rib dinners than he did before his income increased. For Joshua, prime-rib dinners are
normal goods
Assume that a college student purchases only Ramen noodles and textbooks. If Ramen noodles are an inferior good and textbooks are a normal good, then the substitution effect associated with a decrease in the price of a textbook, by itself, will result in
an increase in the consumption of textbooks and a decrease in the consumption of Ramen noodles
Pepsi and pizza are normal goods. When the price of pizza falls, the substitution effect by itself will cause a
movement along the indifference curve so that the consumer buys less Pepsi
Assume that a consumer’s indifference curve is bowed inward and satisfies the other three properties of indifference curves. As the consumer moves from left to right along the horizontal axis, the consumer’s marginal rate of substitution
decreases
The substitution effect of a price change is depicted by a
movement along the original indifference curve to the point where the marginal rate of substitution equals the price ratio for the new set of prices.
A consumer chooses an optimal consumption point where the
ratio of the marginal utilities equals the ratio of the prices.
A consumer chooses an optimal consumption point where the
rate at which the consumer is willing to trade one good for another equals the price ratio.
All Giffen goods are
inferior goods, but not all inferior goods are Giffen goods.
