Consumer Choice Flashcards
What is the budget set?
The set of all baskets that are affordable.
What is the budget constraint?
The set of all baskets which the consumer may purchase given the limits of available income.
What is the budget line?
The set of baskets one can buy when spending all available income.
What is the equation of the budget line?
How do changes in income affect the budget line?
How do changes in the price of goods affect the budget line?
An increase in income will shift the budget line to the right, because more of each good becomes available.
A decrease in income will shift the budget line to the left, less of each good becomes available.
If the price of x increases, the budget line get steeper and the horizontal intercept shifts in.
If the price of y increases, the budget line gets flatter and and thevertical intercept shifts down.
What is the rational choice?
The consumer chooses the basket that maxmises utility given the constraint that budget imposes.
What is an interiro optimum?
At what point does it occur?
The optimal consumption basket is at a point where the indifference curve it tangent to the budget line.
The rate at which the consumer would be willing to exchange good x for good y is the same as the rate at which they are exchnaged in the market place.
What is the equal slope condition?
At the optimal basket, each good gives equal staisfaction given their price.
What is a corner point?
What is a composite good?
A corner point is where one good is not being consumed at all and the optimal basket lies on the axis.
Composite goods are goods that represent the collective expenditure on every other good except the commodity being considered.
If bundle A and bundle B cos the same and the consumer chooses bundle A, what can we infer?
A is weakly preferred to B. So the only inference we can make is that A must be at least as good as bundle B.
If bundle A and B are bot affordable but bundle A costs more than B and the consumer chooses bundle A, what can we infer?
We can infer that bundle A is strictly preferred to bundle B.
