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Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

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CHAP. 4] CONSUMER DEMAND THEORY 71

Glossary

Budget constraint line Shows all the different combinations of two commodities that a consumer can purchase, subject

to a given money income and the prices of the two commodities.

Consumer equilibrium The point where a consumer maximizes the total utility or satisfaction, subject to a given

income and price constraints.

Consumer’s demand curve It shows the amount of a commodity the consumer would purchase at various prices,

ceteris paribus.

Engel curve Shows the amount of a commodity that the consumer would purchase per unit of time at various levels of

income.

Income-consumption curve The locus of points of consumer equilibrium resulting when only the consumer’s income

is varied.

Income effect The increase in the quantity purchased of a commodity with a given money income when the commodity

price falls.

Indifference curve Shows the various combinations of two commodities which yield equal utility or satisfaction to the

consumer.

Marginal rate of substitution (MRS xy ) The amount of commodity Y that a consumer is willing to give up in order to

gain one additional unit of commodity X (and still remain on the same indifference curve).

Marginal utility (MU ) The change in the total utility per unit change in the quantity of a commodity consumed per unit of

time.

Price-consumption curve The locus of points of consumer equilibrium resulting when only the price of the commodity

is varied.

Principle of diminishing marginal utility A concept stating that as an individual consumes more units of a commodity

per unit of time, the total utility received increases, but the extra or marginal utility decreases.

Saturation point The point where the total utility received by an individual from consuming a commodity is maximum

and the marginal utility is zero.

Substitution effect The increase in the quantity purchased of a commodity when its price falls (as a result of consumers

switching from the purchase of other similar commodities).

Total utility (TU ) The overall satisfaction that an individual receives from consuming a specified quantity of a commodity

per unit of time.

Utility The property of a commodity that satisfies a want or need of a consumer.

Review Questions

1. When total utility increases, marginal utility is (a) negative and increasing, (b) negative and declining, (c) zero, or

(d ) positive and declining.

Ans. (d ) See Fig. 4-1.

2. If the MU of the last unit of X consumed is twice the MU of the last unit of Y consumed, the consumer is in equilibrium

only if (a) the price of X is twice the price of Y, (b) the price of X is equal to the price of Y, (c) the price of X

is one half of the price of Y, or (d ) any of the above is possible.

Ans. (a) See Example 3.

3. The statement C ¼ D ¼ 10 utils implies (a) an ordinal measure of utility only, (b) a cardinal measure of utility only,

(c) an ordinal and a cardinal measure of utility, or (d ) none of the above.

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