Chapter 6 - Consumer Theory

Behavioral economics integrates psychology into economic decision-making. What is its core principle concerning how individuals perceive money?

• Money has constant and stable value regardless of the situation.
• People's spending is only influenced by their income levels.
• The perceived value of money can vary depending on the context.
• Individuals always prefer more money to less.

What does a budget constraint illustrate in consumer theory?

• The level of utility that maximizes consumer satisfaction.
• The inflation rate that affects consumer purchasing power.
• The maximum number of goods a firm can produce.
• The various combinations of two goods a consumer can afford with a limited income.

At which point does consumer equilibrium occur on a budget line?

• When the marginal utility of the goods equals their prices.
• When the income effect no longer applies.
• When the ratio of the prices of the goods is equal to the ratio of their marginal utilities.
• When the total utility is at its minimum level.

What is diminishing marginal utility?

• The increase in total utility a consumer gets from consuming one more unit of a good.
• The decrease in satisfaction from consuming additional units of a good after reaching a saturation point.
• The reduction in additional satisfaction as one consumes more units of a good.
• The point where additional units of a good no longer provide any utility.

What does it mean for a good to be "fungible"?

• It is easily replaceable by another identical item and holds the same value.
• It can only be produced by a monopolistic company.
• It provides diminishing marginal utility.
• It has no utility to the consumer.

What is the income effect in the context of a price increase for a good?

• It is the increased income required to purchase the same amount of the good.
• It is the reduction in the quantity of the good demanded because of the higher price.
• It refers to the reduced effective buying power when the price of a good increases.
• It is the additional income earned by working overtime to afford the more expensive good.

What does marginal utility indicate?

• The total satisfaction received from a given level of consumption.
• The additional utility gained by increasing consumption by one more unit.
• The utility lost when one less unit of a product is consumed.
• The cost of producing one additional unit of a good.

What is "marginal utility per dollar"?

• The amount of utility gained from spending one more dollar on a good.
• The total utility divided by the cost of the good.
• The utility gained from the last dollar spent on all goods.
• The additional satisfaction gained relative to the price of a good.

What is demonstrated by the substitution effect?

• The tendency for consumers to buy more of a good as its price rises.
• The inclination to substitute a good with another that provides more utility per dollar.
• The change in consumption resulting from a change in real income.
• The habit of consuming only goods that have increasing marginal utility.

What is 'total utility' in consumer theory?

• The satisfaction a consumer derives from the last unit consumed.
• The maximum utility that a consumer can achieve with a given budget.
• The aggregate satisfaction obtained from all units of goods consumed.
• The level of utility where a consumer can no longer perceive any additional satisfaction.