Consumer Behavior B Flashcards
What is a budget constraint?
A budget constraint describes the set of consumption bundles for which the total money spent does not exceed available income.
How is the budget line defined?
The budget line is the set of consumption bundles where the consumer’s income is fully spent.
What is the slope of the budget line?
It indicates the opportunity cost of one good in terms of another, calculated as -PX/PY.
What is the tangency condition in optimal consumption?
The tangency condition states that the slope of the indifference curve equals the slope of the budget line at the optimal bundle.
What does the Lagrangian method solve in consumer behavior?
It solves the optimal consumption choice by transforming a constrained maximization problem into an unconstrained one.
What is the formula for optimal consumption with Cobb-Douglas utility?
X(PX, I) = αI/PX; Y(PY, I) = (1−α)I/PY, where α represents the income share.
How do price changes affect the budget constraint?
An increase in the price of one good pivots the budget line inward, reflecting fewer affordable quantities of that good.
How is the Lagrange multiplier interpreted in consumer behavior?
It measures the marginal utility of income, indicating how sensitive the optimal utility is to changes in income.
What is a budget set?
the set of consumption bundles which lie on or below the budget line
Increase of Px
figure a page 6
Increase of Py
figure b page 7
Decrease of I
figure c page 8
BUDGET CONSTRAINT: QUANTITY LIMITS
page 10 (ajouter explication)
In the case of a Cobb-Douglas utility function depends only of ?
the own price (and on the budget)
The demand for the two goods is proportional to the Cobb-Douglas parameters α and (1 − α). These can thus be interpreted as the income shares of the two goods.
Lagrange multiplier for cobb douglas utility function
λ = 1/I holds in the optimum
the marginal utility of income decreases when income increases.
