Chapter 9

Question 1

what are consumption choices constrained by

Answer 1

constrained by income and price of goods

Question 2

what is a budget line and where is it affordable and unaffordable

Answer 2

describes the limits to its consumption choices, anything inside the budget line is affordable and anything outside is unaffordable

Question 3

what is the best affordable choice

Answer 3

on the budget line

on the highest attainable indifference curve

has a marginal rate of substitution between the two goods equal to the relative price of the two goods

Question 4

What is real income

Answer 4

a household’s income expressed as a quantity of goods that the household can afford to buy

Question 5

relative price

Answer 5

is the price of a good divided by another good, also equal to opportunity cost and marginal rate of substitution –> MRS = slope of curve

Question 6

indifference curve

Answer 6

a line that shows combinations of goods among which a consumer is indifferent, indifferent means that two items will provide the same amount of satisfaction or utility

Question 7

close substitutes

Answer 7

some goods substitute so easily for each other that most of us do not even notice which we are consuming, for example a whiteboard marker doesn’t matter the brand

Question 8

complements

Answer 8

some goods do not substitute each other at all, instead they are complements for example a right and left running shoes

Question 9

price effect

Answer 9

the effect of a change in the price of a good on the quantity of the good consumed, other things remaining the same