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20 Cards in this Set

  • Front
  • Back
theory of consumer behavior
description of how consumers allocate incomes among different goods and services to maximize their well-being
market basket (bundle)
List with specific quantities of one or more goods.
indifference curve
curve representing all combinations of market baskets that provide a consumer with the same level of satisfaction

- they cannot intersect
- they are all downward sloping (more of a good is better than less)
indifference map
graph containing a set of indifference curves showing the market baskets among which a consumer is indifferent
marginal rate of substitution (MRS)
maximum amount of a good that a consumer is willing to give up in order to obtain one additional unit of another good.
perfect substitutes
two goods for which the marginal rate substitution of one for the other is a constant

- indifference curves are straigh lines)
perfect complements
two goods for which the MRS is infinite; the indifference curves are shaped as right angles
good for which less is preferred rather than more.
numerical score representing the satisfaction that a consumer gets from a given market basket
utility function
a formula that assigns a level of utility to individual market baskets.
ordinal utility function
utility function that generates a ranking of market baskets in order of most to least preferred
cardinal utility function
utility function describing by how much one market basekt is preferred to another.
budget constraints
constraints that consumers face as a result of limited incomes
budget line
all combinations of goods for which the total amount of money spent is equal to income
marginal benefit
benefit from the consumption of one additional unit of a good
marginal cost
cost of one additional unit of a good
corner solution
situation in which the marginal rate of substitution for one good in a chosen market basket is not equal to the slope of the budget line
marginal utility (MU)
additional satisfaction obtained from consuming one additional unit of a good.
diminishing marginal utility
principle that as more of a good is consumed, the consumption of additional amounts will y ield smaller additions to utility
equal marginal principle
principle that utility is maximized when the consumer has equalized the marginal utility per dollar of expenditure across all goods