524 section 9 Behind the Demand Curve: Consumer Choice
discouraged by the tax. The greater the elasticity of de-
mand or supply, or both, the larger the deadweight loss
from a tax. If either demand or supply is perfectly in-
elastic, there is no deadweight loss from a tax.22.Alump-sum taxis a tax of a fixed amount paid by all
taxpayers. Because a lump-sum tax does not depend on
the behavior of taxpayers, it does not discourage mutu-
ally beneficial transactions and therefore causes no
deadweight loss.
23.Consumers maximize a measure of satisfaction
calledutility.We measure utility in hypothetical
units called utils.
24.A good’s or service’s marginal utilityis the additional
utility generated by consuming one more unit of the
good or service. We usually assume that the principle
of diminishing marginal utilityholds: consumption
of another unit of a good or service yields less addi-
tional utility than the previous unit. As a result, the
marginal utility curveslopes downward.
25.Abudget constraintlimits a consumer’s spending to
no more than his or her income. It defines the con-
sumer’sconsumption possibilities,the set of all af-
fordable consumption bundles. A consumer who
spends all of his or her income will choose a consump-
tion bundle on the budget line.An individual chooses
the consumption bundle that maximizes total utility,
theoptimal consumption bundle.
26.We use marginal analysis to find the optimal con-
sumption bundle by analyzing how to allocate the
marginal dollar. According to the optimal consump-
tion rule,with the optimal consumption bundle, the
marginal utility per dollarspent on each good and
service—the marginal utility of a good divided by its
price—is the same.Substitution effect, p. 458
Income effect, p. 459
Price elasticity of demand, p. 460
Midpoint method, p. 462
Perfectly inelastic demand, p. 466
Perfectly elastic demand, p. 467
Elastic demand, p. 467
Inelastic demand, p. 467
Unit-elastic demand, p. 467
Total revenue, p. 468
Cross-price elasticity of demand, p. 475
Income elasticity of demand, p. 476
Income-elastic demand, p. 476
Income-inelastic demand, p. 476
Price elasticity of supply, p. 477
Perfectly inelastic supply, p. 478
Perfectly elastic supply, p. 479
Willingness to pay, p. 483
Individual consumer surplus, p. 485
Total consumer surplus, p. 485
Consumer surplus, p. 485
Cost, p. 489
Individual producer surplus, p. 490
Total producer surplus, p. 490
Producer surplus, p. 490
Total surplus, p. 495
Progressive tax, p. 499
Regressive tax, p. 499
Proportional tax, p. 499
Excise tax, p. 499Tax incidence, p. 502
Deadweight loss, p. 506
Administrative costs, p. 508
Lump-sum tax, p. 508
Utility, p. 511
Util, p. 512
Marginal utility, p. 513
Marginal utility curve, p. 513
Principle of diminishing marginal utility, p. 513
Budget constraint, p. 514
Consumption possibilities, p. 514
Budget line, p. 514
Optimal consumption bundle, p. 515
Marginal utility per dollar, p. 518
Optimal consumption rule, p. 520Key Terms
1.Nile.com, the online bookseller, wants to increase its total rev-
enue. One strategy is to offer a 10% discount on every book it
sells. Nile.com knows that its customers can be divided into
two distinct groups according to their likely responses to the
discount. The accompanying table shows how the two groups
respond to the discount.a.Using the midpoint method, calculate the price elasticities
of demand for group A and group B.
b.Explain how the discount will affect total revenue from
each group.
c.Suppose Nile.com knows which group each customer be-
longs to when he or she logs on and can choose whether or
not to offer the 10% discount. If Nile.com wants to increase
its total revenue, should discounts be offered to group A or
to group B, to neither group, or to both groups?
2.Do you think the price elasticity of demand for Ford sport-
utility vehicles (SUVs) will increase, decrease, or remain the
same when each of the following events occurs? Explain your
answer.Problems
Group A Group B
(sales per week) (sales per week)
Volume of sales before 1.55 million 1.50 million
the 10% discount
Volume of sales after 1.65 million 1.70 million
the 10% discount