2: budget constraint

Question 1

utility

Answer 1

set of numerical values informing about relative rankings of cons. bundle

Question 2

utility function

Answer 2

describes IC location & form, assigns IC curve utility value

Question 3

preferred bundle’s assigned utility level will be

Answer 3

higher

Question 4

utility ordinal or cardinal

Answer 4

ordinal

Question 5

ordinal

Answer 5

consumption bundle ranked (not measured)

Question 6

positive monotonic transformation

Answer 6

utility function can be transferred into another as long as preferences are maintained

Question 7

MRS

Answer 7

gradient of any point on IC curve

Question 8

MRS def

Answer 8

max amount of one good consumer sacrifices to obtain another unit of diff good whilst maintaining utility level

Question 9

for convex IC, MRS

Answer 9

diminishing

Question 10

perfect substitutes graph

Answer 10

parallel downwards straight lines

Question 11

perfect complements graph

Answer 11

L shaped

Question 12

imperfect substitutes

Answer 12

downwards curve

Question 13

perfect substitutes function

Answer 13

U(X+Y)

Question 14

imperfect substitutes function

Answer 14

U(XY), Cobb Douglas

Question 15

perfect complements function

Answer 15

U=min(X,Y)

Question 16

budget constraint assumption

Answer 16

only 2 goods consumed are q1&q2, prices are p1&p2, M= income, no future saving

Question 17

budget constraint written as

Answer 17

(p1 × q1 )+(p2 × q2 )≤M

Question 18

if bundle sits on budget line

Answer 18

all income spent

Question 19

if bundle is under budget line

Answer 19

less than budget spent

Question 20

MRT

Answer 20

budget line gradient

Question 21

consumer’s optimal bundle is which IC curve

Answer 21

the highest

Question 22

to find optimal cons bundle

Answer 22

highest IC curve, tangency rule

Question 23

tangency rule

Answer 23

MRS = MRT, and MU1/p1 = MU2/p2

Question 24

perfect substitutes optimal bundle

Answer 24

corner solution

Question 25

perfect complements optimal bundle

Answer 25

where vertex (L shape) hits IC curve

Question 26

income transfers vs coupons

Answer 26

income transfers give higher utility, don’t distort relative prices, and give consumer flexibility.

Question 27

do tax, subsidies, and quotas affect b.c.

Answer 27

yes

Question 28

quasilinear utility function

Answer 28

IC curve hits one of the axes