Chapter 6: individual choice

Question 1

How will individuals act to achieve their goals?

Answer 1

In a rational manner

maximizing well one being which can include loved ones and others

act in ways that are consistent with achieving objectives

Question 2

How do economist analyse individual decision making (two ways)

Answer 2

Utility analysis (cardinal utility)

Indifference analysis

Question 3

Utility analysis (cardinal utility)

Answer 3

Portray individuals as maximimising their measurable utility

Measurable concept of satisfaction

Question 4

Indifference analysis (ordinal utility)

Answer 4

Weaker analysis is made on individuals’ capabilities of measuring their satisfaction

We cannot say they can measure it numerically (not quanitified)

We can only say that they measure it in a way that a a group of products gives them more satisfaction then another (ordinal utility)

Individuals rank utility bundles

includes budget constraint

includes indifference curve

Question 5

Total utility

Answer 5

Measure of total satisfaction from consuming all amounts of goods and services

its calculated all over a period of time

increases when more amounts are consumed

Question 6

Marginal utility calculation

Answer 6

Delta total utility / delta consumption

Question 7

Marginal utility

Answer 7

Addition to total utility created when one more unit of a good or service is consumed

marginal utility declines with each additional unit consumed, but always remains positive

Question 8

Consumer equilibirum

Answer 8

MU good 1 / P good 1

Marginal utility per dollar spent on each of the last unit of each good is equal

Same condition must be true for all pair of goods

greatest utility per dollar

MU good 2 / P good 2

if equality doesn’t hold, causer can increase Total Utility by making switches

Question 9

In the real world, how is consumer behaviour observed?

Answer 9

Through the demand curve

Effect of price change on the demand of consumer can be seen through the condition that describes his or her equilibrium

If price of a certain good falls (considering a lot of different goods are present), then to restablish equilibrium condition, Marginal Utility of this good must also be lowered

This makes demand curve slope downwards since when more of this good is purchase, Marginal Utility also declines

Will lead to buying complementary goods and less substitutes

Question 10

Law of demand

Answer 10

Other things being equal, more of a good is demanded at a lower price

Question 11

Cantril ladder

Answer 11

Measure that compares utility levels

Lowest value signifies worst possible life

10 is highest possible quality of life

Question 12

United Nations Human Development Index

Answer 12

Base don level of income

Health

Education

Question 13

Budget constraint

Answer 13

The maximum amount an individual or organization can spend

Question 14

Affordable set of goods and services

Answer 14

Bounded by the budget line

Depends on budget

Question 15

Non affordable set of goods and services

Answer 15

Strictly above budget line

Non attainable with current budget

Question 16

Indifference curve

Answer 16

Combination of goods and services that yield same level of satisfaction to consumer

Can determine wether products are substitutes or complements when price change

Question 17

Indifference map

Answer 17

Set of indifference curves

Curves further from origin = higher satisfaction

describes consumer’s tastes for two goods over all consumption levels

Question 18

What are the four properties of an indifference map

Answer 18

1. Indifference curve further from origin = higher satisfaction
2. Indifference curves are negatively sloped
   If a consumer gets more of one good, then it
   diminishes the consumption of the other to
   remain indifferent
3. Indifference curves cannot intersect
   If they were to intersect, we would have
   two levels of satisfaction with same commodity
   bundle, which is impossible
4. Indifference curves are convex when viewed at the origin
   It shows a diminishing marginal rate of
   substitution

Question 19

What does the convex shape of indifference curve reflect

Answer 19

That when we have less of a certain good, each unit gives us more satisfaction

If we have a lot of it, each unit does not convey as much satisfaction

Level of satisfaction per unit decreases as we consume more

thats why it became flatter as it moves from left to right on the graph

its slope is the indifference curve or the budget line

Question 20

Marginal rate of substitution

Answer 20

The slope of the indifference curve (negatively sloped)

less of one good requires more of the other to maintain level of satisfaction

Question 21

Diminishing marginal rate of substitution

Answer 21

Higher marginal value being associated with smaller quantities of any good consumed

Question 22

Consumer optimization

Answer 22

How to get highest level of satisfaction possible

The constraint is the budget line

gives our highest possible indifference curve

happens when budget line touches indifference curve (where they are tangent)

tangent: line touches curve at one point and never touches it again

Question 23

What happens when the budget line touches the indifference curve at a single point

Answer 23

Constraint is tangent to the indifference curve

It requires that each slope be at the same point if tangency

optimization is reached

Question 24

The slope of the budget constraint is the negative to what?

Answer 24

Negative to price ratio

Question 25

What is the slope of the indifference curve

Answer 25

The marginal rate of substitution (MRS)

Question 26

When does the consumer optimize

Consumer optimum

Answer 26

Marginal rate of substitution = slope of the price line

Consumption bundle is a point in which price ration = marginal rate of substitution (MRS)

when budget line touches the indifference curve at a single point

Question 27

What happens when budget increases

Answer 27

If no price changes, the slope of budget line stays the same

It shifts outwards in parallel way

will reach higher indifference curve

consumer can afford more of both goods

Can have higher level of satisfaction

Question 28

If price of goods increase and budget stays the same, what happens to budget line (budget constraint)

Answer 28

The slope become steeper and go a bit to the left

Cant consume as much

Can determine wether products are substitutes or complements

It also affect cross price elasticities ( it can show wether goods in a bundle are substitutes or complements)

reaches lower level of indifference curve, hence less satisfaction

Question 29

What are two government policies that support low income families

Answer 29

Pure income transfers

Price subsidies

Increase purchasing power (unlike tax that reduces purchasing power)

Question 30

What do the social assistance payments (welfare) or employment insurance provide

income Transfers

Answer 30

Provide an increase of income to the ones in need

Will shift the budget line outwards parallel (if all the rest stays the same)

Question 31

What do the price subsidies do

Answer 31

Enable individuals to purchase goods or services at lower price

Ex: rent or daycare subsidies

Will rotate budget line so that only consumption is of good intended at first

government doesn’t want mans to buy random shit instead of daycare par ex

Question 32

when prices decrease, what happens to budget constraint line

Answer 32

it becomes flatter

you can buy more

Question 33

marketing tastes, what do they do to the indifference curves?

Answer 33

it defines where the indifference curve lies on the graph

if competitor of certain good attracts you more at a certain point, the indifference curve will shift towards their side

Question 34

Indifference analysis: Tastes

Answer 34

counterpart of Total Utility and Marginal Utility variables

assume consumer prefers more to less

tastes can be represented graphically with indifference map

Question 35

Income consumption curve

Answer 35

Curve is made by the points of each bundles of good chosen at each level of income

Question 36

Price consumption curve

Answer 36

Shows how consumer consumption choices change when price of one good changes