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ch 10
the rational consumer - (marginal) utility
34
Economics
10/23/2008

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Term
The utility of a consumer is:
Definition
A measure of the satisfaction the consumer derives from consumption of goods and services
Term
An individual's consumption bundle is:
Definition
the collection of all the goods and services consumed by that individual
Term
An individual's utility function gives:
Definition
the total utility generated by his or her consumption bundle.
Term
A util is:
Definition
a unit of utility.
Term
The marginal utility of a good or service is:
Definition
The change in total utility generated by consuming one additional unit of that good or service.
Term
The marginal utility curve shows:
Definition
How marginal utility DEPENDS on the quantity of a good or service consumed.
Term
The principle of Diminishing Marginal Utility says that:
Definition
Each successive unit of a good or service consumed adds less to total utility than the previous unit.
Term
Utility is:
Definition
A measure of a person's satisfaction from consumption, expressed in units of UTILS.
Term
Consumers try to maximize:
Definition
Their Utility.
Term
A consumer's utility function shows the relationship between the:
Definition
Consumption bundle and the total utility it generates.
Term
To maximize utility, a consumer considers:_______. It is illustrated by (which curve)?
Definition
the marginal utility from consuming one more unit of a good or service, illustrated by the Marginal Utility Curve.
Term
The Principle of Diminishing Marginal Utility holds:
Definition
Easch successive unit consumed adds less to toal utility than the previous unit.
Term
A Budget Constraint requires that:
Definition
The cost of a consumer's consumption bundle be no more than the consumer's total income
Term
A consumer's Consumption Possibilites is the set of:
Definition
All consumption bundles that can be consumed given the consumer;s income and prevailing prices.
Term
A consumer's Budget Line shows:
Definition
The consumption bundles available to a consumer who spends all of his or her Income.
Term
The Optimal Consumption Bundle is the consumption bundle that :
Definition
Maximizes a consumer's total utility given his or her budget constraint.
Term
The Budget Constraint requires that:
Definition
A consumer's total expenditure be no more than his or her income.
Term
The consumer's Consumption Possibilites are:
Definition
The set of consumption bundles that satisfy the budget constraint.
Term
A Consumer who spends all of his or her income chooses a point on his or her
Definition
Budget Line.
Term
The budget line's Slope is __________ to the opportunity cost of the good on the horizontal axis in terms of the good on the vertical axis.
Definition
Equal.
Term
The consumption choice that maximizes total utility given the consumer's budget constraint is the:
Definition
Optimal Consumption Bundle.
Term
The optimal consumption bundle must lie on the _________________________ line.
Definition
Consumer's Budget.
Term
The Marginal Utility per Dollar spent on a good or service is:
Definition
The additional utility from spending One more dollar on that good or service.
Term
The optimal Consumption Rule says that:
Definition
when a consumer maximizes utility, the marginal utility per dollar spent must BE THE SAME for all goods and services in the consumption bundle.
Term
A utility-maximizing consumer allocates spending so that:_________. It is also known as the __________________ rule.
Definition
The Marginal Utility per dollar (the marginal utility of a good divided by its price) is the same for all goods. It is also known as the Optimal Consumption Rule. (The optimal consumption bundle satisfies this rule
)
Term
Whenever the marginal utility per dollar is higher for one good than for another good, the consumer should spend_________________. By doing this, the consumer will ___________________.
Definition
One dollar MORE on the good with the higher marginal utility per dollar and one dollar LESS on the other. By doing this, the consumer will move closer to his or her optimal consumption bundle.
Term
The Individual demand Curve for a good shows the relationship between:
Definition
Quantity demanded and price for an individual consumer.
Term
The Substitution Effect of a change in the price of a good is the change in the:
Definition
Quantity consumed of that good as the consumer substitutes the good that has become relatively cheaper for the good that has become relatively MORE expensive.
Term
The Income Effect of a change in the price of a good is the change in the:
Definition
Quantity consumed of that good that results from a change in the consumer's purchasing power due to the change in the price of a good.
Term
The market demand curve for a good is:
Definition
The horizontal sum of each consumer's Individual Demand Curve.
Term
Most goods absorb only a ___________ of a consumer's spending. For such goods, the _______________ of a price change is the only important effect of the price change of demand. It causes _________________________.
Definition
a) Small Fraction
b) Substitution Effect
c) Individual demand curves and the market demand curve to slope DOWNWARD.
Term
When a good absorbs a large fraction of a consumer's spending, the:
Definition
Icome Effect of a price change is present in addition to the Substitution Effect.
Term
For normal goods, demand rises/falls when:
Definition
A consumer is richer and falls when a consumer is poorer, so that income effect reinforces the substitution effect.
Term
For inferior goods, demand rises/falls when:
Definition
A consumer is poorer and falls when a consumer is richer, so that the icnome and substitution effects move in the opposite direction.