Consumer theory 2 Flashcards
What is a perfect substitute? What does the IC curve look like and the slope?
Consumer substitutes one good for another at a constant rate. They will consume one good at a time. IC is a straight downward sloping line with a slope/MRS of a negative fixed number.
What is a perfect complement? What does IC curve look like and the slope?
2 goods that are always consumed together in fixed proportions so the IC is L shaped e.g one customer wont buy one more right shoe without one more left shoe.
Where does consumption take place on a perfect complements IC curve and is the proportion of consumption always 1?
Consumption takes place at corner/kink of IC curve. Not always 1 but always proportional e.g 2 sugars, 1 tea = 4 sugars 2 teas.
Whats an economic bad? What does the IC look like and the slope?
A good consumer doesnt like (subject to consumers preference). Upward sloping as by giving consumer a good they dont like they have to be compensated by being given more of a good they do like so they can remain on same IC curve.
Whats a neutral good? What does the IC curve look like?
A good that consumers dont care about/are indifferent to. If neutral good is on the vertical axis then it is horizontal line, if neutral good on horizontal axis then IC curve is vertical. Slope/MRC is 0 or infinity.
What is satiation? What does the IC look like?
The satiation or bliss point is the best bundle of goods. IC curves surround bliss point - further away = more dissatisfied. IC curve negative when too much or too little of both goods. Positive slope when have too much of a good it becomes an economic bad.
What is the MRS? How to work it out?
Rate at which a consumer is willing to give up one good for another. Consumers willing to give up goods for others at any point except from where budget constraint line = IC as this is the optimal consumption point.
-Mux/Muy
How to find the marginal utility of good x?
Change in utility/Change in consumption of good x
How to construct a utility function from an indifference curve?
Draw a diagonal line from the origin going through all the indifference curves stating how far away they are from the origin.
What is the utility function of a perfect substitute?
U = ax + by whereby a and b are constants that represent the value each good holds to the customer e.g if the ratio isnt 1:1
What is the slope of the indifference curve for a perfect substitute identified by utility function?
-(a/b) as the slope is equal to MRS = Mux/Mub so Mux = change in MU/ change in consumption which equals a and the same for Y so MRS = -(A/B) as downard sloping.
What is the utility function for perfect complements?
Min (x1,x2) as can only consume the minimum amount of x1 or x2. E.g adding one more unit to bundle (10,10) would equal (11,10) but still have to consume (10,10) leaving on same IC. If ratio isnt 1:1 e.g it is 2:1 then = min(x1, 1/2x2)
What is the Cobb-Douglas utility function?
Represents the relationship between inputs and outputs (returns to scale). U = X (raise to a) y (raised to b). If a+b>1 = increasing returns to scale.
What is MRS based on Cobb-Douglas utility function?
MRS =MuX/MuY. MuX = X(raised to a-1) y(raised to b) same for MuY (differentiated in terms of Y) so MRS = -(ay/bx)
What is a normal good?
Whereby a change in consumption of x / Change in income > 0
