Consumer theory 3 Flashcards

1
Q

What is a giffen good?

A

Goods that violate the law of demand, they have an upward sloping demand curve so as the price increases, quantity demanded increases.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What are the two effects of a change in the price of a good?

A

Substitution effect - when relative price of good rises people will seek substitutes so QD decreases
Income effect - rise in price of good relative to income decreases a persons purchasing power so they can’t afford as much as they could before.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

How does the substitution effect affect the budget contraint?

A

When relative price changes but income remains the same the budget line pivots on the axis of the good that hasn’t changed in price and remains tangent to the original indifference curve as utility remains the same.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

How to work out the substitution effect mathematically?

A

Budget constraint; m = P1X1 + P2X2
New budget constraint; m’ = P1’x1 + P2X2
Change in income; m’-m = P1’X1 - P1X1
Plug both outcomes in demand function and subtract the new quantity from the old quantity.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

How does the income effect affect the budget constraint?

A

Shifts the pivoted line so they are parallel (keeps relative prices fixed at new price). It is the change in demand for good 1 when income changes at the new price.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

How to work out the income effect mathematically?

A

x1(P’-m) - x1(P’-m’)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

State whether the income and substitution effect is positive or negative for the following?
a) normal good when P of vertical good increases
b)inferior good when P of vertical good increases
c) when income effect outweighs substitution effect

A

a) both negative
b) substitution = negative, income effect = positive
c) giffen good

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is the income and substitution effect of perfect substitutes and perfect complements?

A

0

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

How to derive the demand curve from the budget constraint and indifference curves for a normal good?

A

Drop a line down on to diagram below at the intial equilibrium where budget constraint and IC are tangent. If price of vertical axis good increases, budget line pivots inwards, find new equilibrium point with new IC and plot onto diagram below.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is characterisitc / attribute theory? Give an example.

A

Whereby consumer yields utility from the characteristics of the good and not the good itself. E.g laptops dont all yield the same utility if they have different attributes such as different storage space, battery life etc.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What are the assumptions of attribute theory?

A

Goods possess various characteristics
Different brands possess different characteristics in different amounts.
Characteristics are measureable (objective)
Characterisitcs in an important factor for determining consumer choice among price and income.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is an attribute ray?

A

Represent quantities of different goods that can be brought with a given sum of money, optimum is formed whereby all these are joint to form a curve. Highest point per ray derives the most utility as IC are derived at each point.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly