Chapter 4

Question 1

Indifference Curve

Answer 1

a curve that defines the combinations of two goods that give a consumer the same level of satisfaction

Question 2

Marginal Rate of Substitution

Answer 2

the rate at which a consumer is willing to substitute one good for another and still maintain the same level of satisfaction

Question 3

Budget set

Answer 3

the bundles of goods a consumer can afford

Question 4

Budget line

Answer 4

the bundles of goods that exhaust a consumer’s income

Question 5

Market of Substitution

Answer 5

the rate at which one good may be traded for another in the market; slope of the budget line

Question 6

Consumer Equilibrium

Answer 6

the equilibrium consumption bundle is the affordable bundle that yields the greatest satisfaction to the consumer

Question 7

Substitution Effect

Answer 7

the movement along a given indifference curve that results from a change in relative prices of goods holding real income constant

Question 8

Income effect

Answer 8

the movement from one difference curve to another that results from the change in real income caused by a price change

Question 9

Curves farther from the origin imply…

Answer 9

higher levels of satisfaction than curves closer to the origin

Question 10

Transitivity

Answer 10

• indifference curves do not intersect one another

- eliminates the possibility consumer is caught in perpetual cycle of indifference

Question 11

The 4 Properties

Answer 11

• completeness
• more is better
• diminishing marginal rate of substitution
• transitivity

Question 12

Marginal rate of substitutions final answer has to be

Answer 12

absolute value

Question 13

Budget Constraint Equation

Answer 13

y= m-px/ py

Question 14

Slope of the budget line

Answer 14

-px/py

Question 15

Marginal Utility

Answer 15

derived from last unit of consumption

Question 16

Optimality Conditions

Answer 16

MRS=px/py

MuX/px= MuY/Py

MUx/MUy= Px/Py

Question 17

Formula for Substitution Effect

Answer 17

Xo-Xm

Question 18

Formula for income effect

Answer 18

Xm-X1

Question 19

Diminishing Marginal Rate of Substitution

Answer 19

as consumer obtains more of good x the amount of good Y they are willing to give up decreases

Question 20

What can’t indifference curves never do in relation to shape?

Answer 20

Never Can Slope UP!!!!!

Question 21

How to find income using budget?

Answer 21

PxX + PyY=M

Question 22

Diminishing Marginal Utility

Answer 22

-the more of something you get the less additional utility you get

Question 23

What does a change income not effect assume price is held constant?

Answer 23

the slope

Question 24

Consumer opportunities

Answer 24

represent the possible goods and services consumers can afford to consume

Question 25

Consumer preferences

Answer 25

determines which of the goods will be consumed

Question 26

Utility

Answer 26

Ability of a good or service to satisfy one or more needs or wants of a consumer. Read more: http://www.businessdictionary.com/definition/economic-utility.html#ixzz3ToNCUsRc

Question 27

How to draw substitution effect?

Answer 27

-draw parallel to new budget constraint

Question 28

Completeness

Answer 28

a preference or indifference among all bundles

Question 29

Explain convexity?

Answer 29

.......

Question 30

Draw Voucher Example

Answer 30

.....

Question 31

Draw BOGO offer

Answer 31

.......

Question 32

Draw Quantity Discounts

Answer 32

........

Question 33

What is true about all the goods on an indifference curve?

Answer 33

they all provide the same level of satisfaction

Question 34

total earnings=

Answer 34

fixed payment + wages X hours worked

Question 35

Corner Solutions

Answer 35

optimum occurs where consumers only buy 1 good