Demand - Consumer Behavior

Question 1

Indifference Curves

Answer 1

Consumers’ tastes (without regard to what they can afford)

Question 2

Budget Lines

Answer 2

Consumers’ Opportunities (without regard to his/her preference)

Question 3

Marginal Rate of Substitution

Answer 3

Number of units of good y for which consumer is willing to trade on unit of good x (Posititve).

Slope of the indifference curve (Negative)

Question 4

Marginal Rate of Substitution (Names)

Answer 4

Marginal Value (of a good in terms of the other)
Marginal Willingness to Pay (for a good in terms of the other)

Question 5

Consumer’s Choice

Answer 5

In optimum the consumer chooses the most preferred of the bundels which the consumer can afford. It’s the best affordable bundle of consumption goods.

Question 6

Tangency Condition

Answer 6

For “nice” indifference curves and budget lines: The bundle the consumer chooses (the optimal consumption bundle) will be located where her budget line is tangent to one of her indifference curves.

Question 7

Normal Goods

Answer 7

Goods you consumer more when your income rises [xa –> xb]

Question 8

Inferior Goods

Answer 8

Goods you consume less when your income rises [xa –> xc]

Question 9

Income Consumption Curve

Answer 9

The set of consumption bundles for different levels of income. We construct the ICC by determining and connecting the optimal consumption bundle for all levels of income. The curve is in a coordinate system with good x and y on the respective axis.

Question 10

Engel Curve

Answer 10

A curve showing, for fixed prices, the relationship between income and the quantity of a good consumed. It is used to represent the sensitivity of consumption to changes in money income.

Question 11

Income Elasticity of Demand

Answer 11

The percent change in consumption that results from a 1% increase in income

Question 12

Ordinary Goods

Answer 12

The quantity demanded x of ordinary goods decreases with price Px.

Question 13

Giffen Goods

Answer 13

The quantity demanded x of Giffen goods increase with price increase Px.

Question 14

Substitiution Effect

Answer 14

Indicates how the consumer “substitutes” one good for the other when a price changes but the consumer is (hypothetically) compensated for the price change (i.e. he is equally happy)

Question 15

Income Effect

Answer 15

The change in consumption due to a change in income

Question 16

Price Elasticity of Demand

Answer 16

The percent change in consumption that results from a 1% increase in price

Question 17

Inelastic Demand

Answer 17

Consumers show little or no reaction to price changes — steep demand curves

Question 18

Elastic Demand

Answer 18

Consumers strongly react to price changes —flat demand curves

Question 19

Cross-Price Elasticity of Demand

Answer 19

The percent change in consumption of x that results from a 1% increase in the price of a related good (say y)

Question 20

Substitutes

Answer 20

Goods for which the cross elasticity of demand is positive

Question 21

Complements

Answer 21

Goods for which the cross elasticity of demand is negative