B| Indifference Curves Flashcards
What is the general shape of an indifference curve?
Downward sloping, steeper on the left and flatter on the right
What is the concept of indifference curves?
Tradeoffs to any household choice
______ each indifference curve shows the combinations of leisure and income that provide a certain level of utility.
Labor-Leisure Choice
In an ________ each indifference curve shows the combinations that provide a certain level of utility.
Intertemporal Choice
________ provide the basis for a more in depth look at complementary motivations that arise in response to a change in price, wage, or rate of return.
Indiffrence Curves
what do indifference curves illiminate the need of?
Placing numerical values on utility
the process of making utility maximizing decisions
all points along a single ______ curve provide the same level of utility.
indifference
Higher indifference curves indicate a _____ level of utility.
Higher
Why do indifference curves slope downward?
because utility is to remain the same;
reduction /increase in quantity on the vertical axis must be counterbalanced by and increase/reduction of the quantity of the good on the horizontal axis.
Why are indifference curves steeper on the far left and flatter on the far right?
Because of the law of diminishing marginal utility.
What are two effects the change in the price on any good has?
- a substitution effect
2. Income effect
What does an indifference curve show on a budget constraint diagram?
The tradeoffs between two goods
the ______ choice along a budget constraint will be the point of tangency where the budget constraint touches an indifference curve at a single point.
Utility maximizing choice.
The _____ effect motivation encourages a utility maximizer to buy less of what is relatively more expensive and more of what is relatively cheaper.
Substitution effect
The ______ effect motivation encourages a utility maximizer to buy more of both goods if utility rises or less of both goods if utility falls. (Both Normal Goods)
Income Effect
What is the substitution of a wage increase?
Choose more income; less expensive to earn
Less Leisure; Since opportunity cost has risen
What is the income effect of a wage increase?
Choose more income and leisure; since they are both normal goods
In the _________ every interest rate change has a substitution and income effect.
Intertemporal Consumption Choice
What is the substitution effect of an interest rate increase?
more future consumption; cheaper now
less present consumption; since opportunity cost of present consumption in terms of what is given up in the future has increased.
What is the income effect of an interest rate increase?
More of both present and future consumption; since they are both normal goods
What are two similarities with indifference curves?
- They are downward sloping from left to right
- They are convex with respect to the origin
——In other words——
Steeper on the left and flatter on the right
the ______ of the indifference curve means a trade off of one less of a good is necessary to get more of the other, while holding utility constant.
downward slope
What is the reasoning behind an indifference curve that is steeper onthe left and flatter on the right?
Dminishing marginal utility
How does the marginal rate of substituion apply to the indifference curve?
it is the rate at which a person is willing to trade one food for another so the utility will remain the same.
Two reasons the slope of the indifference curve changes?
the marginal rate of substitution;
quantity of one good traded for the other to keep utility constant
diminishing marginal utility of both goods
Every level of _____ will have its own indifference curve.
Utility
True or False:
All point on higher indifference curves have greater utility then all points on lower indifference curves.
True
What assumption is the argument about the shapes of indifference curves based on?
The assumptions that when people have less of one good they need more of another to make up for it.
A _____ can be mapped out to describe the preferences of any individual.
Field of Indifference Curves
True or False;
Because each person determines his/her own preferences and utility. The specific shape of indifference curves can be different for everybody.
True
The highest achievable indifference curve touches the _______ at a a single point of tangency.
Opportunity Set
Why will there always be one indifference curve that touches the budget line at a single point of tangency?
Because an infinite number of indifference curves exist.
All _____ will be completely above the budget line;
though they have higher utility they are not affordable.
higher indifference curves
What two ways will the lower indifference curves cross the budget line?
- when one indifference curve crosses the budget line in two places there will always be another higher attainable indifference curve touching the budget line at one point of tangency.
How do changes in income affect the budget constraint?
rise in income = shift to the right
reduction in income= shift to the left
What does a higher/lower indifference curve respresent in terms of income?
higher indifference curve = higher utility
lower indifference curve = lower utility
The ____ on the original budget set occurs where the opportunity set is tangent to the higher possible indifference curve.
Utility Maximizing Choice
What can cause differences even when budget constraints are the same?
- Personal Preferences
- Different reactions to a response to a change in income
What is the response to a higher level of income when it comes to normal goods?
Purchase more of them
What is the response to higher income when goods are inferior?
Purchase less of them
______ is when a change in price results in people seeking substitutes.
Substitution Effect
_____ is how a change in price of a good alter the effective buying power of ones income.
The Income effect
If the price of a good ____ then buying power has risen
fallen
If the price of a good _____ buying power of a given amount of income is diminished.
Rises
The _______ is the point of tangency between the original budget constraint and indifference curve.
original choice
The _____ is the point of tangency between the new budget constraint and the lower indifference curve.
New Point
The _______ in a substitution and income diagram is used to separate the two effects.
Dashed line
What determines the slope of the budget constraint?
The relative price of two goods.
The slope of the _______ is determined by the original relative prices
original budget line
The slope of the ______ is determined by the new relative prices.
New Budget Line
