consumers and incentives

Question 1

buyer’s problem (steps)

Answer 1

how to spend
1. what do you like
2. how much does it cost
3. budget

Question 2

what do you like

Answer 2

tastes and preferences
biggest bang for our buch

Question 3

how much does it cost (2 characteristics)

Answer 3

the price is fixed
we can buy as much as we want without driving up the price

Question 4

budget (2 assumptions)

Answer 4

no saving or borrowing, only buying
only purchase whole units

Question 5

budget set

Answer 5

all possible bundles of g&s that can be purchased with a consumer’s income

Question 6

budget constraint

Answer 6

what alternative of the budget set is the most beneficial for a person (negative slope)

Question 7

the opportunity cost of one good (over another)

Answer 7

opportunity cost good 1 = loss in good 2 / gain in good 1

Question 8

trade-off

Answer 8

ratio of good 1 vs good 2

Question 9

optimal solution at

Answer 9

marginal benefit of each good should be equal
budget completely spent

Question 10

optimal solution formula

Answer 10

MB1/ P1 = MB2/P2

Question 11

budget constraint: price changes (2)

Answer 11

decrease in the price of either causes the budget constraint to pivot outward (can buy more)
increase in the price of either will cause the budget constraints to move inwards (buy fewer)

Question 12

budget constraint: income changes

Answer 12

increase in income causes an outward shift
decrease in income causes an inwards shift

Question 13

why does the demand curve have a negative slope

Answer 13

diminishing marginal benefit

Question 14

consumer surplus

Answer 14

difference between what you are willing to pay and what you have to pay (market price)

Question 15

consumer surplus formula

Answer 15

base x height / 2

Question 16

demand elasticity

Answer 16

measure of how sensitive one variable is to the changes in another

Question 17

price elasticity of demand + formula

Answer 17

how much does the Qd change when the good’s price changes
Ed = % change in Qd / % change in price

Question 18

elasticity measures

Answer 18

Ed > 1 elastic
Ed < 1 inelastic
Ed = 1 unit elastic
Ed = ∞ perfectly elastic
Ed = 0 perfectly inelastic

Question 19

total revenue

Answer 19

P x Q

Question 20

effect of price on revenue (inelastic)

Answer 20

increases more than quantity decreases = total revenue increases
lowers but quantity increases only slightly = total revenue decreases

Question 21

determinants

Answer 21

nb and closeness of subs
budget share spent on the good
time horizon available to adjust to price changes

Question 22

determinant: nb and closeness of subs

Answer 22

nb of available subs grows the price elasticity of demand increases

Question 23

determinant: budget share spent on the good

Answer 23

spend more of budget on a good the price elasticity of demand increases

Question 24

determinant: time horizon available to adjust to price changes

Answer 24

consumers respond much less to price changes in the short run then in the long run

Question 25

the cross price elasticity of demand

Answer 25

how much does the quantity demand of one good change when the price of another good changes

Question 26

cross-price elasticity result

Answer 26

negative = complement
positive = subsidies

Question 27

income elasticity of demand

Answer 27

how much does quantity demanded change when income changes