Chapter 3: Consumer Behavior, Microeconomics, Sixth Edition, Robert S. Pindyck, Daniel L. Rubinfield

Front 1

theory of consumer behavior

Back 1

description of how consumers allocate incomes among different goods and services to maximize their well-being

Front 2

market basket (bundle)

Back 2

List with specific quantities of one or more goods.

Front 3

indifference curve

Back 3

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)

Front 4

indifference map

Back 4

graph containing a set of indifference curves showing the market baskets among which a consumer is indifferent

Front 5

marginal rate of substitution (MRS)

Back 5

maximum amount of a good that a consumer is willing to give up in order to obtain one additional unit of another good.

Front 6

perfect substitutes

Back 6

two goods for which the marginal rate substitution of one for the other is a constant

- indifference curves are straigh lines)

Front 7

perfect complements

Back 7

two goods for which the MRS is infinite; the indifference curves are shaped as right angles

Front 8

bad

Back 8

good for which less is preferred rather than more.

Front 9

utility

Back 9

numerical score representing the satisfaction that a consumer gets from a given market basket

Front 10

utility function

Back 10

a formula that assigns a level of utility to individual market baskets.

Front 11

ordinal utility function

Back 11

utility function that generates a ranking of market baskets in order of most to least preferred

Front 12

cardinal utility function

Back 12

utility function describing by how much one market basekt is preferred to another.

Front 13

budget constraints

Back 13

constraints that consumers face as a result of limited incomes

Front 14

budget line

Back 14

all combinations of goods for which the total amount of money spent is equal to income

Front 15

marginal benefit

Back 15

benefit from the consumption of one additional unit of a good

Front 16

marginal cost

Back 16

cost of one additional unit of a good

Front 17

corner solution

Back 17

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

Front 18

marginal utility (MU)

Back 18

additional satisfaction obtained from consuming one additional unit of a good.

Front 19

diminishing marginal utility

Back 19

principle that as more of a good is consumed, the consumption of additional amounts will y ield smaller additions to utility

Front 20

equal marginal principle

Back 20

principle that utility is maximized when the consumer has equalized the marginal utility per dollar of expenditure across all goods