Chapter 5 (Week 3)

Question 1

An individual chooses an optimal bundle of goods

Answer 1

by picking the bundle on the highest indifference curve that touches the budget line.

Question 2

Price Consumption Curve (PCC)

Answer 2

The line through the optimal bundles
- Shows optimal combinations as price changes

Question 3

Engel curve

Answer 3

Curve showing the relationship between the quantity demanded of a certain good and the income of the customer

Normal good: slopes right
Inferior good: slopes left

Question 4

Derive the demand and engel curve mathematically

Answer 4

Find MRS and MRT
Equate them
Solve MRS = MRT for one of the goods and find the amount of that good using the budget constraint

Question 5

Giffen good

Answer 5

when the demand curve for one good slopes upwards. It occurs when the negative income effect is larger than the substitution effect

Question 6

Substitution effect

Answer 6

The change in the quantity of a good that a consumer demands when that good’s price rises
- Holding utility constant, as the price of the good increases, consumer’s substitute other now relatively cheaper goods for that one

Question 7

Income effect

Answer 7

The change in quantity of a good that a consumer demands because of a change in income

Question 8

Income and substitution effect with an inferior good

Answer 8

If a good is inferior, the income effect and the substitution effect move in opposite directions