1. Consumer Choices - Rational Choice + Application

Question 1

Preference Ordering

Answer 1

Ranking all possible consumption bundles in order of preference

Question 2

Consumer Preferences

Answer 2

1. Completeness
2. Transitivity
3. More-is-better
4. Continuity
5. Convexity

Question 3

Indifference Curve Properties

Answer 3

1. Indifference curve passes through every possible consumption bundle
2. Downwards Sloping
3. ^ indifference curve = ^ level of utility
4. different indifference curves cannot intersect
5. curves are convex to original
   - MRS = slope of indifference curve

Question 4

Marginal Rate of Substitution (MRS)

Answer 4

Max amount of goods a consumer is willing to give up to get an extra unit of another good –> while keeping utility constant
- MRS falls as we move along indifference curve (diminishing MRS)

Question 5

Utility Function

Answer 5

Utility here is level of satisfaction consumer receives from a given consumption bundle
- Total Utility ^ as amount of goods ^
- Can be expressed in terms of income

Question 6

Marginal Utility

Answer 6

Measures slope of the Utility function (partially derivative of the UF).
- ^ falls as more goods are consumed ‘Principle of Diminishing Marginal Utility’

Question 7

Budget Constraint

Answer 7

Tells us what an individual can afford given prices and their income.
- slope of BC = opportunity cost of good X + Y.
- More than 2 Goods, look at ‘composite goods’ where price is now normalised to £1 per unit

Question 8

Utility Maximising Bundles

Answer 8

Need:
1. to be located on the budget line
2. give the most preferred combination of g+s, must be on the highest attainable indifference curve

Question 9

Maximised Utility

Answer 9

• Utility is maximised when the budget is allocated so that MU per £ of expenditure is the same for each good
• Can max. utility by consuming only 1 good = ‘corner solution’.

Question 10

Non-Linear BC

Answer 10

The relationship between income, prices, and the quantity of goods is not straight
- happens when there are taxes and subsidies are involved.

Question 11

In-Kind Transfer

Answer 11

Transfers that are tied to a particular good or service (housing benefits etc)
- V.S. Cash Transfers = direct transfer payments of money to eligible individuals that aren’t required to be spent on a good or service (pensions)
- Cash transfer payments are better as they don’t restrict choices.
- In-Kind have the advantage of preventing cash being used on other purposes.