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20 Cards in this Set
- Front
- Back
theory of consumer behavior
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description of how consumers allocate incomes among different goods and services to maximize their well-being
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market basket (bundle)
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List with specific quantities of one or more goods.
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indifference curve
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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) |
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indifference map
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graph containing a set of indifference curves showing the market baskets among which a consumer is indifferent
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marginal rate of substitution (MRS)
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maximum amount of a good that a consumer is willing to give up in order to obtain one additional unit of another good.
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perfect substitutes
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two goods for which the marginal rate substitution of one for the other is a constant
- indifference curves are straigh lines) |
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perfect complements
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two goods for which the MRS is infinite; the indifference curves are shaped as right angles
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bad
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good for which less is preferred rather than more.
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utility
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numerical score representing the satisfaction that a consumer gets from a given market basket
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utility function
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a formula that assigns a level of utility to individual market baskets.
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ordinal utility function
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utility function that generates a ranking of market baskets in order of most to least preferred
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cardinal utility function
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utility function describing by how much one market basekt is preferred to another.
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budget constraints
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constraints that consumers face as a result of limited incomes
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budget line
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all combinations of goods for which the total amount of money spent is equal to income
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marginal benefit
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benefit from the consumption of one additional unit of a good
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marginal cost
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cost of one additional unit of a good
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corner solution
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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
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marginal utility (MU)
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additional satisfaction obtained from consuming one additional unit of a good.
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diminishing marginal utility
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principle that as more of a good is consumed, the consumption of additional amounts will y ield smaller additions to utility
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equal marginal principle
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principle that utility is maximized when the consumer has equalized the marginal utility per dollar of expenditure across all goods
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