Consumer's Equilibrium

Question 1

What is consumer equilibrium?

Answer 1

Consumer equilibrium is the point at which a consumer maximizes their utility, given their budget constraint.

Question 2

True or False: Consumer equilibrium occurs when the marginal utility per dollar spent is equal for all goods consumed.

Answer 2

True

Question 3

Fill in the blank: The law of _______ states that as a consumer consumes more units of a good, the additional satisfaction (utility) gained from each additional unit decreases.

Answer 3

diminishing marginal utility

Question 4

What does the budget line represent?

Answer 4

The budget line represents all the combinations of two goods that a consumer can purchase with a given income.

Question 5

What is the formula for calculating marginal utility?

Answer 5

Marginal Utility = Change in Total Utility / Change in Quantity

Question 6

What happens to consumer equilibrium if the price of a good increases?

Answer 6

If the price of a good increases, the consumer may need to adjust their consumption to maintain equilibrium.

Question 7

True or False: A consumer is in equilibrium when they are spending all their income.

Answer 7

False

Question 8

What is the role of indifference curves in consumer theory?

Answer 8

Indifference curves represent combinations of goods that provide the same level of satisfaction to the consumer.

Question 9

Define the term ‘utility’.

Answer 9

Utility is the satisfaction or pleasure derived from consuming a good or service.

Question 10

What is the concept of ‘marginal rate of substitution’?

Answer 10

The marginal rate of substitution is the rate at which a consumer is willing to give up one good in exchange for another while maintaining the same level of utility.

Question 11

Fill in the blank: The point of consumer equilibrium is where the _______ curve is tangent to the budget line.

Answer 11

indifference

Question 12

What is the significance of the point of tangency in consumer equilibrium?

Answer 12

The point of tangency indicates the optimal consumption bundle that maximizes utility within the budget constraint.

Question 13

True or False: The total utility increases as a consumer consumes more of a good.

Answer 13

True, but at a decreasing rate due to diminishing marginal utility.

Question 14

How does a decrease in income affect consumer equilibrium?

Answer 14

A decrease in income shifts the budget line inward, leading to a new equilibrium point with lower consumption of goods.

Question 15

What is the relationship between price changes and consumer equilibrium?

Answer 15

Price changes can alter the budget line and affect the quantities of goods consumed, leading to a new equilibrium.

Question 16

What does the term ‘substitution effect’ refer to?

Answer 16

The substitution effect refers to the change in quantity demanded of a good due to a change in its price relative to other goods.

Question 17

What is the ‘income effect’?

Answer 17

The income effect is the change in consumption resulting from a change in real income due to price changes.

Question 18

Fill in the blank: A consumer will reach equilibrium when _______ is maximized.

Answer 18

utility

Question 19

What is the impact of consumer preferences on equilibrium?

Answer 19

Consumer preferences determine the shape of the indifference curves and influence the choice of goods at equilibrium.

Question 20

True or False: A consumer can be in equilibrium with an unequal distribution of marginal utility.

Answer 20

False

Question 21

What does a shift in the indifference curve indicate?

Answer 21

A shift in the indifference curve indicates a change in consumer preferences or changes in the utility derived from goods.

Question 22

What is the assumption of ‘rational behavior’ in consumer theory?

Answer 22

The assumption of rational behavior posits that consumers aim to maximize their utility given their constraints.

Question 23

How does consumer equilibrium relate to market demand?

Answer 23

Consumer equilibrium reflects the choices of individual consumers, which collectively shape the market demand curve.

Question 24

Define ‘opportunity cost’ in the context of consumer choice.

Answer 24

Opportunity cost is the value of the next best alternative that is forgone when a choice is made.