Chap 3.3

Question 1

whats a strict preference

Answer 1

between 2 bundles he chooses one when the other is also available

Question 2

whats a weak preference

Answer 2

indifference to both bundles

Question 3

whats completeness

Answer 3

indifference

Question 4

whats transitivity

Answer 4

if he likes bundles A then he likes it over all bundles

Question 6

whats utility

Answer 6

is the level of satisfaction that is obtained by consuming a commodity or undertaking an activity

Question 8

what are the 2 measures of utility

Answer 8

cadinalist and ordinalist school

Question 9

whats utlity measured w in the cardinalist theory

Answer 9

utils

Question 10

what are the assumptions of cardinal utlity theory

Answer 10

1. Rationality of consumers
2. Utility is cardinally measurable
3. Constant marginal utility of money
4. Limited Money Income
5. Diminishing marginal utility (DMU)
6. The total utility of a basket of goods depends on the quantities of the
   individual commodities. TU = f ( n X , X ……X 1 2 )
7. The consumer possesses complete knowledge of market conditions (about
   prices and tastes of goods and services).

Question 11

whats total utility

Answer 11

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

Question 12

whats marginal utility

Answer 12

its the extra satisfaction additional utility
obtained from consuming an additional unit of a commodity.

Question 13

whats the law of diminishing marginal utility

Answer 13

the extra or marginal utility received
from consuming each additional unit of the commodity declines. This is referred to as the law of diminishing marginal utility (LDMU).

Question 14

what are the assumption of the LDMU

Answer 14

1. The consumer is a rational utility maximizing person. The typical consumer does not have to behave irrationally.
2. There is a single homogeneous commodity.
3. There are no changes in the tastes (preferences) and the income of the
   consumer within a given period of time.
4. There is no time gap in consumption of the good.
5. The consumption of all other commodities remaining constant.
6. Commodities are of ordinary type

Question 15

what are the limitations of the cardinal approach

Answer 15

• The assumption of cardinal utility is doubtful because utility may not be
  quantified.
   Utility cannot be measured absolutely (objectively).
   The assumption of constant MU of money is unrealistic because as income increases, the marginal utility of money changes

Question 16

hows utlity expressed in ordinal

Answer 16

in relative terms

Question 17

what are the assumptions of ordinal theory

Answer 17

1. Consumers are rational
   2.Utility is not absolutely measurable
2. Diminishing marginal rate of substitution
3. total utility is measured by all consumed items
4. preference is consistent

Question 18

what are the properties of the indifference curves

Answer 18

1. Indifference curves have negative slope (downward sloping to the right).
2. Indifference curves are convex to the origin
3. A higher indifference curve is always preferred
4. Indifference curves never cross each other

Question 19

what is the marginal rate of substitution

Answer 19

rate at which consumers are willing to substitute one commodity for another in such a way that the consumer remains on the same
indifference curve.

Question 20

whats a budget line

Answer 20

it shows the constraint of the consumer by his/her income and prices of the two commodities. shows the combinations of 2 goods that they can purchase accordingly.

Question 21

what are the assumptions of the budget line

Answer 21

There are only two goods bought in quantities, say, X and Y
Each consumer is confronted with market determined prices, PX
and PY
The consumer has a known and fixed money income

Question 22

what are the factors responbsible for the shift in the budget line

Answer 22

change in income and price

Question 23

why does change in income affect budget line

Answer 23

more income enables to buy more of a good

Question 24

what happens when theres a proportional change in prices

Answer 24

rise in price w the same income will reduce the total quantity bought for goods, this leads to a shift towards budget line.

Question 25

what happens when theres a change in relative prices

Answer 25

either one price changes or both but not the same amount. then budget line becomes steeper and the horizontal intercept changes.

Question 26

what are the 2 conditions for consumer to maximize his utility

Answer 26

• marginal rate of sub = price
• indifference curve must be convex to the origin.