Microeconomics Chapter 7: Consumer Choice: Utility Theory and Insights from Behavioral Economics

Vocabulary flashcards covering key definitions and concepts from Chapter 7, including utility theory, budget constraints, substitution and income effects, and insights from behavioral economics.

Budget line

Shows all the combinations of two goods that exhaust a consumer's budget.

Budget set

The set of affordable combinations, which includes the budget line and combinations that cost less than the budget.

Marginal utility

The change in utility from a one-unit increase in a product.

Marginal principle

A decision rule to increase the level of an activity as long as its marginal benefit exceeds its marginal cost, choosing the level at which the marginal benefit equals the marginal cost.

Equimarginal rule

Pick the combination of two activities where the marginal benefit per dollar for the first activity equals the marginal benefit per dollar for the second activity.

Substitution effect

The change in consumption resulting from a price decrease that leads a consumer to consume more of that good because it becomes relatively less expensive.

Income effect

The change in consumption resulting from a price decrease that increases effective purchasing power, leading to increased consumption assuming the good is normal.

Striatum

The region of the brain responsible for the valuation of rewards.

Prefrontal cortex (PFC)

The region of the brain that gathers gut feelings and combines them with cognition (conscious thought) about the possible consequences of an action.

Present bias

A phenomenon where a person either ignores or underestimates the future consequences of an action.

Heuristics

Simple rules used by the brain for dealing with complex situations.

Mental accounting

A mental shortcut where a consumer economizes on decision making by separating decisions into different types or accounts.

Anchoring

A cognitive shortcut where the brain latches on to seemingly unrelated numbers or a high original price and uses them for decision making.

Decoy effect

A strategy where products that are not designed to sell are introduced to make other high-profit products look more appealing.