3. Consumer preferences and the concept of utility

Question 1

basket

Answer 1

A combination of goods and services that an individual might consume.

Question 2

consumer preferences

Answer 2

Indications of how a consumer would rank (compare
the desirability of) any two possible baskets, assuming
the baskets were available to the consumer at no cost.

Question 3

Assumption about consumer preferences

Answer 3

1. Preferences are complete
   She prefers basket A to basket B (written A > B).
   She prefers basket B to basket A (written B > A).
   She is indifferent between, or equally happy with, baskets A and B (written A ~ B).
2. Preferences are transitive (she prefers basket A to basket B, and basket B to basket E, then expect her to prefer basket A to basket E. If A > B and if B > E, then A > E)
3. More is better (she likes more food better than less food and prefers to have more clothing rather than less clothing)

Question 4

ordinal ranking

Answer 4

Ranking that indicates whether a consumer prefers one basket to another, but does NOT CONTAIN QUANTITATIVE INFORMATION about the INTENSITY of that preference.

Question 5

cardinal ranking

Answer 5

A QUANTITATIVE MEASURE of the INTENSITY of a preference for one basket over another.

Question 6

utility function

Answer 6

A function that measures the level of satisfaction a
consumer receives from any basket of goods and
services.

Question 7

marginal utility

Answer 7

The rate at which total utility changes as the level of

consumption rises.

Question 8

When drawing total utility and marginal utility curves

Answer 8

1. Total utility and marginal utility cannot be plotted on the same graph.
2. The marginal utility is the slope of the (total) utility function.
3. The relationship between total and marginal functions holds for other measures in economics.

Question 9

principle of diminishing marginal utility

Answer 9

The principle that after some point, as consumption of a good increases, the marginal utility of that good will begin to fall.

Question 10

indifference curve

Answer 10

A curve connecting a set of consumption baskets that

yield the same level of satisfaction to the consumer.

Question 11

Indifference curves on an indifference map have the following four properties.

Answer 11

1. When the consumer likes both goods (i.e., when MUx and MUy are both positive), all the indifference curves have a negative slope.
2. Indifference curves cannot intersect.
3. Every consumption basket lies on one and only one indifference curve.
4. Indifference curves are not “thick.’’

Question 12

marginal rate of substitution

Answer 12

The rate at which the consumer will give up one good to get more of another, holding the level of utility constant.

Question 13

diminishing marginal rate of substitution

Answer 13

A feature of consumer preferences for which the marginal rate of substitution of one good for another good diminishes as the consumption of the first good increases along an indifference curve.