Utility and Indifference

Question 1

utility

Answer 1

the satisfaction
received from
consuming a good or
service

Question 2

law of DMU

Answer 2

the more units of a good
that are consumed,
the lower the utility
from consuming those
additional (marginal)
units, until MU eventually reaches zero and TU is maximised (point of satiety)

Question 3

total utility

Answer 3

the total
satisfaction received
from consuming all
chosen units of a good
or service

Question 4

EMP

Answer 4

consumer
maximises utility by
consuming at the point
where the marginal
utilities per dollar from
each of the two goods
are equal

Question 5

budget line

Answer 5

shows
the boundary of
an individual’s
consumption set, given
the amount available to
spend and the prices of
the goods

Question 6

indifference curve

Answer 6

a curve showing
the combinations of
two goods that give
equal total utility to a
consumer

Question 7

MRS

Answer 7

the slope
of an indifference curve,
showing the amount
of one good that a
consumer must give up
in exchange for another
while keeping total
utility constant

Question 8

consumer equilibrium (IC)

Answer 8

the point at which a
consumer maximises
utility at the tangency
between an indifference
curve and the budget
line

Question 9

substitution effect

Answer 9

following a change
in the price of a good, consumers substitute the now relatively cheaper good for the more relatively more expensive one
affects relative prices

key word: relative

Question 10

income effect

Answer 10

following a price change, a consumer has higher real income and purchases more of it

Question 11

giffen good

Answer 11

type of inferior good for which the income effect is so strong that it more than offsets
the substitution effect so quantity demanded and price are inversely related and demand curve is upward sloping