Demand and Supply Analysis: Consumer Demand

Question 1

Consumer choice theory

Answer 1

Branch of micro relating consumer demand curves to consumer preferences (willingness to trade off between goods)

Question 2

Utility theory

Answer 2

Consumer knows his preferences and acts rationally to obtain preferred consumption bundle

Question 3

Describe use of indifference curves in decision making

Answer 3

All combinations of two goods such that consumer is indifferent among options

Question 4

Describe use of opportunity sets in decision making

Answer 4

Graph preferences based on different opportunities that are available.

Question 5

Describe use of budget constraints in decision making

Answer 5

Calculate zero of each good for axis intercepts, connect line for slope (rise over run)

Question 6

Calculate/interpret budget constraint

Answer 6

Quantity of X times Price of X + QyPy . . . < Budget

Question 7

Determine consumer’s equilibrium bundle of goods based on utility analysis

Answer 7

MRS(xy) equals Px/Py

Question 8

Compare substitution and income effects

Answer 8

If good declines in price, it is substituted more for other goods in the basket. Consumer’s income also can buy more goods than previously.

Question 9

Distinguish between normal and inferior goods; explain Giffen and Veblen goods

Answer 9

Inferior goods people buy less of when price decreases, normal goods people buy more of with price decrease. Giffen good is inferior with income effect greater than substitution effect. Veblen good is something people buy more of when price increases (conspicuous consumption).

Question 10

Marginal rate of substitution of XY

Answer 10

Consumer willing to give up ___ units of Y for 1 unit of X, but not less