Chap 3

Question 1

What is consumer behavior?

Answer 1

its the response of the consumer

Question 2

explain consumer behavior in 3 steps

Answer 2

1. examining consumer’s preference
2. taking into account that consumer’s budget constraints
3. consumer preference + budget constraint = determine consumer choice

Question 3

what is Utility

Answer 3

Its the level of satisfaction or enjoyment derived from the consumption of a good or a service.

Question 4

what are the properties of the concept of utility

Answer 4

1. utility does not mean its useful
2. utility is not subjective
3. the utility of a product can be different at different places and time
4. getting the maximum utility from a good

Question 5

what are the 2 approaches of measuring utility

Answer 5

the cardinal and ordinal approach

Question 6

what is the cardinal utility theory

Answer 6

in this theory utility is measurable by the arbitrary unit of measurement called utils in the form of 1,2,3etc…

Question 7

what are the assumptions of cardinal utility theory ?

Answer 7

1. rationality of consumers
2. utility is cardinally measurable
3. constant marginal utility of money
4. limited money income
5. diminishing marginal utility
6. TU depends on the quantities of the individual commodities

Question 8

what is total utility ?

Answer 8

its the total satisfaction a consumer gets from consuming some specific quantities of a commodity at a particular time.

Question 9

what is a marginal Utility

Answer 9

its the extra satisfaction a consumer realizes from an additional unit of the product.

Question 10

what is the law of diminishing marginal utility

Answer 10

the quantity consumed of a commodity increases per unit of time, the utility derived from each successive unit decreases, consumption of all other commodities remaining constant.

Question 11

what are the assumptions of LDMU

Answer 11

1. the consumer is rational
2. the consumer is consuming identical products( same everything)
3. no time gap in between consumption
4. the consumers preferences remains unchanged.

Question 12

what is the equilibrium of a consumer ?

Answer 12

equilibrium is reached when allocation of expenditure is used in a way that the last birr spent on each commodity yields the same utility

Question 13

what are the limitation of the cardinal approach?

Answer 13

1. utility may not be quantified
2. utility cannot be measured absolutely
3. the assumption of MU of money is unrealistic because as income increases, the marginal utility of money changes

Question 14

what is the Ordinal utility theory ?

Answer 14

Its a theory that consumers express the utility of various commodities in relative terms. They rank commodities in the order of their preferences as 1st, 2nd , 3rd and so on.

Question 15

what are the assumptions of ordinal utility theory ?

Answer 15

1. Consumers are rational
2. utility is ordinal
3. diminishing marginal rate of substitution ( will to sub one commodity for another so the total sat is the same)
4. total utility is measured by the quantities of all the items the consumer consumed.
5. consumer’s preferences are consistent

Question 16

what is the indifference schedule

Answer 16

its a schedule of various combination of more than 2 commodities that will be equally accepted by the consumer.

Question 17

whats the indifference curve

Answer 17

its a graph showing combination of 2 goods that give the consumer equal satisfaction and utility

Question 18

what are the properties of indifference curve

Answer 18

1. the curve has negative slope aka downward
2. the curve are convex to the origin (the curve declines more as the consumer moves left -right
3. a higher indifference curve is better
4. curves cannot intersect

Question 19

what Marginal rate of substitution ?

Answer 19

its the nbr of units of Y that must be given up in exchange for an extra until of X so that the level of satisfaction is maintained.

Question 20

what is a budget line?

Answer 20

its a line that shows the various combinations of 2 goods that a consumer can purchase given their income an the prices of the 2 goods

Question 21

what are the assumptions of the budget line?

Answer 21

1. there are only 2 good bought in quantities
2. each good has a market determined prices
3. the consumer has a fixed money income

Question 22

what happens to the budget line if there is a change in income ?

Answer 22

the budget line will shift

Question 23

what happens if there is an increase in income?

Answer 23

the budget line will shift upwards and the consumer will be able to buy more goods

Question 24

what happens if there is a decrease in income?

Answer 24

the budget line will shift downwards and the consumer will have to buy less of the goods

Question 25

what happens if there is an equal raise in the prices of both goods

Answer 25

the budget line will shift downwards because the 2 goods will be too expensive to buy

Question 26

what happens if there is only a decrease or increase in the price of only 1 good and not the other?

Answer 26

the changed good will be the only one affected

Question 27

when is equilibrium of the consumer reached?

Answer 27

when the indifference curve is tangent to the budget line so theyre both equal to each other.