Chapter 4: Consumer Preference and Profit Maximization

Question 1

Assumptions about Consumer Preference

Answer 1

More is preferred to less
Prefers more variety
Consumption and Leisure are normal goods (As income increases, consumers purchase more)

Question 2

Indifference Curve

Answer 2

Set of consumption bundles among which the consumer is indifferent

Question 3

Indifference Curve Properties

Answer 3

Slopes Downward - More > Less

Convex - Consumer likes diversity, Diminishing marginal utility

Question 4

consumer Optimization point

Answer 4

MRSC = w

Question 5

How does a consumer respond to a increase in

1. (pi - T)
2. real wage

Answer 5

1. Disposable income increases - BC shifts up

2. Consumption increases, Leisure may increase or decrease

Question 6

Properties of the production function

Answer 6

Constant RTS
Output increases when K or N increases
MPn decreases as labour input increases (concavity)
MPn increases as capital increases

Question 7

Profit Maximisation

Answer 7

MPn = w