All Flashcards
What is the difference between Marginal Utility and Total Utility?
Marginal utility is the additional satisfaction from one more unit; total utility is the overall satisfaction from all units consumed.
Differentiate between MU and MU/P.
MU is the added satisfaction; MU/P considers the price paid for that satisfaction.
What is the difference between a normal good and an inferior good in the context of utility maximization?
A normal good's consumption increases with income, while an inferior good's consumption decreases.
What is the difference between a substitute good and a complement good in the context of utility maximization?
A substitute good can be used in place of another, while a complement good is consumed together with another.
What is the difference between cardinal utility and ordinal utility?
Cardinal utility assigns a numerical value to satisfaction, while ordinal utility ranks preferences without assigning specific values.
What is the difference between revealed preference and stated preference?
Revealed preference infers consumer preferences from their actual choices, while stated preference asks consumers to express their preferences directly.
What is the difference between risk aversion and risk seeking behavior?
Risk aversion prefers a certain outcome over a gamble with the same expected value, while risk-seeking behavior prefers the gamble.
What is the difference between a budget line and an indifference curve?
A budget line shows the possible combinations of goods a consumer can afford, while an indifference curve shows combinations that give the consumer the same level of satisfaction.
What is the difference between consumer surplus and producer surplus?
Consumer surplus is the difference between what a consumer is willing to pay and what they actually pay, while producer surplus is the difference between what a producer receives and their cost of production.
What is the difference between economic profit and accounting profit?
Economic profit includes both explicit and implicit costs, while accounting profit only includes explicit costs.
What is Utility?
Satisfaction a consumer gets from consuming a good or service.
What is Marginal Utility (MU)?
The additional satisfaction from consuming one more unit of a good or service.
What is Marginal Utility per Dollar (MU/P)?
The additional satisfaction from spending one dollar on a good or service; MU/Price.
What is the Law of Diminishing Marginal Utility?
As you consume more of a good, the additional satisfaction (MU) from each additional unit decreases.
What is Total Utility?
The total satisfaction a consumer gets from consuming a certain quantity of goods or services.
Define Utility Maximization
The process of obtaining the greatest level of overall satisfaction or happiness from consuming goods and services, subject to budget constraints.
What is the budget constraint?
The limit on the consumption bundles that a consumer can afford.
What is consumer equilibrium?
The condition where a consumer allocates their limited income in a way that maximizes their utility, given the prices of goods and services.
What is an indifference curve?
A curve that shows consumption bundles that give the consumer the same level of satisfaction.
What is a marginal rate of substitution (MRS)?
The rate at which a consumer is willing to trade one good for another while maintaining the same level of utility.
How does MU/P guide consumer choices?
Consumers prioritize goods with the highest MU/P to maximize satisfaction within their budget.
Explain how diminishing marginal utility affects consumption patterns.
It encourages diversification as the satisfaction from consuming more of one good decreases.
How does utility maximization apply when allocating a fixed budget between movies and snacks?
Allocate the budget such that the MU/P of the last movie ticket equals the MU/P of the last snack purchased.
How does the concept of utility maximization explain why people buy goods on sale?
A sale increases the MU/P of the good, making it more attractive relative to other goods.
How can the principle of utility maximization be used to explain charitable giving?
Individuals derive utility (satisfaction) from donating to charitable causes, balancing the utility gained from giving with that of consuming other goods and services.
How does utility maximization explain the decision to invest in education?
Individuals invest in education to increase their future earning potential and overall lifetime utility, balancing the costs of education with the expected future benefits.
How does the concept of utility maximization apply to the decision of choosing a career?
Individuals choose careers that they believe will provide the greatest overall satisfaction, considering factors such as salary, job security, work-life balance, and personal fulfillment.
Explain how the concept of utility maximization can be used to understand the demand for luxury goods.
Luxury goods provide a higher level of perceived status and satisfaction, justifying their higher prices for some consumers who prioritize these attributes.
How does utility maximization explain the decision to save or spend income?
Individuals balance the utility of current consumption with the expected future utility from savings, considering factors such as interest rates, inflation, and future needs.
How does the concept of utility maximization apply to the decision of choosing between renting and buying a home?
Individuals weigh the costs and benefits of each option, considering factors such as monthly payments, property taxes, maintenance costs, potential appreciation, and personal preferences.