consumer behaviour

Question 1

what do consumers aim to maximise?

Answer 1

we assume that rational consumers seek to maximise utility given scarce resources

Question 2

is utility based on endogenous or exogenous preferenceS?

Answer 2

exogenous preferences

Question 3

what are budget constraints?

Answer 3

Resources are represented by a budget constraint which is determined by a combination of exogenous prices and income.

Question 4

what are the assumptions about preferences?

Answer 4

completeness - consumers can compare bundles of goods and rank them ie prefer/indifferent
transitivity - consumers rankings of goods are consistent. if a is preferred to b and b is preferred to c then a is preferred to c
monotonicity - in general, more of something is better (more of something we dislike will be worse)

Question 5

what is the effect of diminishing marginal utility of utility curves?

Answer 5

it gives us convexity on the utility curves

Question 6

what is the effect of continutity on utility curves?

Answer 6

there are no sudden jumps in utility and thus it is representable by a utility function

Question 7

what is utility?

Answer 7

utility is a measure of how satisified consumers are

Question 8

what is a utility function?

Answer 8

a utility function describes the relationship between what consumers consume and their well being. they can be plotted on graphs

Question 9

what is ordinal ranking?

Answer 9

bundles can be ranked from best to worse eg pizza is preferred to economics lectures

Question 10

what is cardinal ranking?

Answer 10

this allows a person to say exactly how much better one bundle is compared to another- pizza is 10 times more enjoyable than economics lectures

Question 11

what are the assumptions of marshallian cardinal utility?

Answer 11

the cardinal measurement of utiltiy is called Utils
diminshing marginal utility of consumption
a constant marginal utility of money

Question 12

what is the optimality condition for marshallian cardinal utility?

Answer 12

when the utility gained from the consumption measured in utils is equal to the loss of price measured in the marginal utility of income

Question 13

what are the assumptions for indifferent curve anaylsis?

Answer 13

ordinal measurement of utility
there is no unit of utility measurement
rational individuals choose their quantity demanded to maximise their utility subject to any constraints
there is a budget constraint
there are indifference curves that are derived from utility functions

Question 14

assuming we spend all of the income what is the formula of the indifference curve?

Answer 14

Qy = (income - PxQx)/Py

Question 15

what is the slope of an indifference curve assuming all income is spent?

Answer 15

• (Px/Py) is the slope

Question 16

what does the slope of the budget constraint represent?

Answer 16

the slope of the budget constraint represents the opportunity cost of two goods

Question 17

what occurs to the budget constraint as incomes rise?

Answer 17

the budget constraint is shifted outwards

Question 18

what occurs to the budget constraint if the price of good X falls?

Answer 18

the budget constraint is stretched so that it touches the good X axis at a larger quantity

Question 19

when would a kinked budget constraint appear?

Answer 19

it will appear when there are:
limits to the quantity of a good available
non linear pricing
quantity discounts

Question 20

when is a consumer indifferent between two bundles of goods?

Answer 20

a consumer is indifferent between two bundles of goods if they get the same utility from the two bund;es

Question 21

what is an indifference curve?

Answer 21

An indifference curve plots out all of the bundles that provide a consumer with the same utility.

Question 22

what is prefferable being on a lower indifference curve or on a higher indifference curve?

Answer 22

a higher indifference curve as it is assumed that more goods is better and that the goods are desireable. however there will eventually reach a point due to diminishing returns where we do not want to consume any more. this is the point of satisfaction.

Question 23

twhat is the point of satisfaction?

Answer 23

the point where we do not wish to consume any more of either good

Question 24

what is the slope of the indifference curve called?

Answer 24

it is called the marginal rate of substitution of X for Y (MRSxy). this is what consumers will trade one unit of good X for in exchange for units of good Y

Question 25

what is the formula for the marginal rate of substitution of good X for Y?

Answer 25

• change in Y/ change in X

Question 26

what is the change in utility moving from one place on the indifference curve to the other?

Answer 26

the change in utility is equal to zero

Question 27

how can you find the optimal point of consumption using an indifference curve and the budget constraint?

Answer 27

the optimal consumption is the point where the budget constraint and the indifference curve touch

Question 28

what is the formula at the point of tangency>

Answer 28

the slope of the indifference curve is equal to the slope of the budget constraint at the point of tangency therefore
MUx/MUy = Px/Py

Question 29

if the slope of the indiffernce curve is negative what does this mean>

Answer 29

there are two goods or two economic bads

Question 30

if the slope of the indiffernce curve is postive what does this mean?

Answer 30

there is one good and a bad

Question 31

what does the steepness of the indifference curve tell you?

Answer 31

the steeper curves show the consumer is willing to give up a lot of one good for a little of the other good

Question 32

what is the optimal consumption of two economic bads?

Answer 32

the optimal consumption of two economic bads is zero so at the origin

Question 33

what does the curvature of the indifference curve tell you ?

Answer 33

the more convex to the orign the curves are, the more complementary good X and good Y are

Question 34

if the curve is a perfect subsitute what does the curve look like?

Answer 34

the curve is a straight diagnol line with a negative gradient

Question 35

what is the formula for a utility function of a perfect substitute?

Answer 35

U = aX + bY where a and b are the marginal utilities of good X and Y respectively

Question 36

what are perfect complements?

Answer 36

they are goods that must be consumed together

Question 37

what is the formula for the utility function of a perfect substitute?

Answer 37

U = min {aX, bY} where a and b are the marginal utilities of good X and Y respectively