Economics Chapter 10

Front 1

What is the Principle of Diminishing Marginal Utility?

Back 1

After some point, the Marginal Utility received from each additional unit of a good decreases with each additional unit consumed.

Front 2

As additional units are consumed, marginal utility decreases,__________?

Back 2

but total utility continues to increase

Front 3

When total utility is at a maximum,_____

Back 3

marginal utility is zero.

Front 4

Beyond this point, total utility decreases while marginal utility is _______

Back 4

negative.

Front 5

Any choice that does not give you as many units of utility as possible for the same amount of money ...

Back 5

is an irrational choice.

Front 6

The BASIC PRINCIPLE OF RATIONAL CHOICE states that....

Back 6

people spend their money on those goods that give them the most marginal utility per dollar.

Front 7

When MUx/Px > MUy/Py

Back 7

Consume X

Front 8

Utility Maximizing Rule states that...

Back 8

when the ratios of the marginal utility to price of the two goods are equal, you are maximizing utility

Front 9

MUx/Px = MUy/Py

Back 9

MAXIMIZING UTILITY!!!

Front 10

A person's choice of how much to work is made simultaneously with the person's decision

Back 10

of how much to consume.

Front 11

When the price of a good goes up, the marginal utility per dollar (MU/$) from it goes down,

Back 11

and we consume less of it and its marginal utility increases
(Quantity demanded falls, as price rises!)

Front 12

When the good decreases, the MU/$ increases,....

Back 12

and we consume MORE of it and its MARGINAL UTILITY DECREASES
(Quantity demanded increases as price falls)

Front 13

The inverse relationship between price and quantity demanded

Back 13

is due to the income and substitution effects.

Front 14

The Income Effect

Back 14

is the reduction in quantity demanded when price increases because the price increase makes one poorer

Front 15

Substitution Effect

Back 15

is the reduction in quantity demanded when price increases because you substitute another good for the more expensive one.

Front 16

According to the principle of rational choice, if there is diminishing marginal utility...

Back 16

and the price of supplying something goes UP, you supply MORE of that good. If the price of supplying something goes DOWN, you supply LESS of that good.

Front 17

Opportunity cost

Back 17

benefit forgone of the next-best alternative (in utility, it is the MARGINAL UTILITY PER DOLLAR YOU FORGO)

Front 18

According to the principle of rational choice, to maximize utility,....

Back 18

choose goods until the opportunity cost of all alternatives are equal

Front 19

IF the MUx/Px > MUy/Py,

Back 19

the opportunity cost of not consuming good x is greater than the opportunity cost of not consuming good Y so we consume X.

Front 20

The Assumptions underlying the THEORY OF RATIONAL DECISION

Back 20

1) Decision making is costless 2)Tastes are given 3) Individuals maximize utility

Front 21

Bounded rationality

Back 21

Rationality based on rules of thumb (You get what you pay for = implication that high price equals high quality. "Follow the leader" leads to focal point equilibrium in which a set of goods is consumed because they have become focal points to which people have gravitated.)

Front 22

Tastes are often significantly influenced by

Back 22

society!

Front 23

Conspicuous consumption

Back 23

consumption of goods not for one's direct pleasure, but to show off to others

Front 24

Assumptions of the theory of choice, costless decision making, given tastes, and utility maximization

Back 24

may not always apply when people make decisions.