3. Consumer Theory Flashcards
What is an affordable set?
feasible set, bundles on or below the budget constrain, bundles for which the required expenditure at given prices is less than or equal to the income available
Unafforable set
unfeasible set, bundles that lie outside the budget constraint
What is the equation of the budget line?
P_sS+P_fF=M
What happens when the price of only one good changes?
The slope of the budget constraint changes
If the price of both goods change by the same proportion?
Shift parallel to the original one
What happens when there are more than 3 goods?
The budget constraint becomes a hyperplane or multidimensional plane
Rational consumer choice
All choices that a conusmer has to make a decision
Composite good
The choice between a good X and amalgram of other goodsY
The amount of income left after buying X
The amoun t of the consumer speands on goods other than good X
What is the slope of the budget constraint with a composite good
-P_x
What is a nonlinear budget?
After a set point, the Y changes
What is prefernce ordering?
Ranking of all possible consumption bundles in order of preference
Differ greatly among customers
Four simple properties of prefernce
Completeness Prefernce
The consumer is able to rank all possible combinations of goods and services
More is better principle
OTher than things equal, more of a good is preferred to less
Transitivyt preference
For any three bundles A,B,C, if he prefers A to B and perfers B to C then he always perfer Ato C
A>B
B>C
then A>C
What is the convexity preference?
Mixture of goods are preferable to extremes
What is a bundle?
Combination of particular goods of two or more goods
What is the budget constraint line?
The amount of goods that can be purchased within the budget
What is the equation to determine a maximum amount of goods?
M/P_f
What happens with a nonlinear budget constraint?
A fixed amount until a certain point where it might be cheaper/more expensive
Equally perferrable bundles
Where A and B are equally perferred
Indifference curve
Set of bundles amoung which the consumer is indifferent
Above the curve is still perferred
What are the characteristics of indifference curves?
- Ubiquitous
- Downward slopping
- Cannot cross
- Become less steep as we move downward and to the right along them
What is the marginal rate of substitution?
The rate at which the consumer is willing to exchange one good for another
What is a consumer’s goal?
To choose the best afforable bundle
What is the best afforable bundle?
High indifference curve as possible, given budget constraint
What is a corner solution?
A choice between two goods, a case in which the consumer does not consume one of the goods
