Chapter 3

Question 1

what is the theory of consumer behaviour?

Answer 1

Description of how consumers allocate incomes among different goods and services to maximize their well-being

Question 2

Consumer behaviour is best understood in three distinct steps:

Answer 2

-consumer preferences
-budget constraints
-consumer choices

Question 3

what are the assumptions we make about preferences?

Answer 3

-completeness
-transitivity
-more is better than less

Question 4

what is meant by ‘completeness’?

Answer 4

Preferences are assumed to be complete. In other words, consumers
can compare and rank all possible baskets

Question 5

what is meant by ‘transitivity’?

Answer 5

if a consumer prefers basket A to basket B and basket B to basket C, then the consumer also prefers A to C

Question 6

what is meant by ‘more is better than less’?

Answer 6

Goods are assumed to be desirable

Question 7

what is meant by ‘utility’?

Answer 7

Numerical score representing the satisfaction that a consumer gets from a given market basket

Question 8

what is the utility function?

Answer 8

Formula/equation that assigns a
level of utility to individual market baskets

Question 9

what are ‘perfect substitutes’?

Answer 9

Two goods for which the marginal rate of substitution of one for the other is a constant

Question 10

what are ‘perfect complements’?

Answer 10

Two goods for which the MRS is zero or infinite; the indifference curves are shaped as right angles

Question 11

what are ‘BADS’?

Answer 11

Good for which less is preferred rather than more

Question 12

what is the ‘ordinal utility function’?

Answer 12

Utility function that generates a ranking of market baskets in order of most to least preferred

Question 13

what is the ‘cardinal utility function”?

Answer 13

Utility function describing
by how much one market basket is preferred to another

Question 14

what are budget constraints?

Answer 14

Constraints that consumers face as a result of limited incomes