Consumers

Question 1

What does a budget line show?

Answer 1

the possible combinations of two goods that a person can consume, given the amount
of money he/she has to spend and the prices of the two goods

Question 2

On the budget line, the further from the origin,

Answer 2

the higher the income

Question 3

On the budget line, steepness of the curve measures

Answer 3

the relative prices of the two goods:

–PC/PF

Question 4

What causes the budget line to rotate?

Answer 4

A change in the relative price of one of the goods

Question 5

What happens to the relative price, if one good falls by 1/2

Answer 5

Also falls to 1/2

Question 6

What does the utility function do?

Answer 6

attaches a number to anything

Question 7

What is the importance of the utility function?

Answer 7

individuals act as if they are maximizing their utility

Question 8

What 3 assumptions do economists make about consumer preferences?

Answer 8

1. Completeness - consumers can compare and rank product bundles
2. Transitivity - consumers are consistent in decision making
3. More is better than less

Question 9

What assumptions are made on utility?

Answer 9

1. Utility is increasing in amount of good consumed

2. Utility is increasing at a decreasing rate

Question 10

What is marginal utility and how is it calculated?

Answer 10

The extra utility for an extra unit of good, derivative of utility

Question 11

How is utility maximisation illustrated

Answer 11

indifference curves

Question 12

The indifference curve shows

Answer 12

Bundles of goods that give the same level of utility

Question 13

A higher utility level is indicated by

Answer 13

the curve being further from origin

Question 14

The indifference map is used to

Answer 14

map consumer preferences - applies assumptions about consumer preference

Question 15

How do we predict a consumer’s preference on the indifference map?

Answer 15

1. located on budget line
2. budget line and indifference curve are tangential
3. highest level of satisfaction from combination of goods/services

Question 16

How do we calculate total utility?

Answer 16

Sum of utility * quantity for each product

Question 17

Optimal choices imply

Answer 17

marginal benefit = marginal opportunity cost

Question 18

Marginal rate of substitution is

Answer 18

the amount of a good that a consumer is willing to give up in order to obtain an additional unit of another good

Question 19

Which one is concave and which one is convex? Indifference and Utility

Answer 19

Utility is concave, Indifference is convex

Question 20

What does diminishing marginal utility indicate?

Answer 20

the more the consumer has of one of the goods (food), the less willing he or she is to give up the other good (clothing) and vice versa

Question 21

How do we find out the MRS between two goods?

Answer 21

Slope of the indifference curve

Question 22

Slope of perfect substitutes

Answer 22

Y=-mx +c

Question 23

Slope of perfect complements

Answer 23

Y = z, x = z, Y=mx+c relationship

Question 24

The income-consumption curve traces out

Answer 24

utility-maximising

combination of the two goods for all levels of income

Question 25

Positive income-consumption curve means

Answer 25

Normal goods

Question 26

Engel curves

Answer 26

Use income-consumption curves to relate person’s income to consumption of good

Question 27

What can happen to a good when income rises?

Answer 27

Becomes inferior - consumption reduces