Econ Exam 2.2 March 6

Question 1

What are the indifference curve assumptions?

Answer 1

1) consumers have one budget
2) consumers are rational
3) consumers rank their preferences
4) consumers are consistent
5) consumers are maximizers

Question 2

Indifference Curve

Answer 2

shows all combinations of 2 goods which yield consumers equal amounts of satisfaction

Question 3

On an indifference curve what is unique about the points?

Answer 3

all of the points are just as satisfying (same marginal utility)

Question 4

What are the characteristics of the ID curve?

Answer 4

downward slope, convex to origin shape, curves never cross, infinite number of indifference curves

Question 5

Another Definition for Indifference Curves

Answer 5

a single indifference curve is a locus of points that are all from the same level of utility

Question 6

Marginal Rate of Substitution (MRS)

Answer 6

the amount of one good a consumer could substitute for another good to remain equally satisfied, slope of the indifference curve

Question 7

Does the rate of trade off change every time you move along the curve?

Answer 7

YES! also, people are happiest with a balance of goods

Question 8

Why can the ID curves not cross?

Answer 8

if they cross, you violate consistency. Therefore, the ID curves must be parallel.

Question 9

Budget Line

Answer 9

Shows all the maximum combinations of 2 goods that a consumer is able to select, given their income and the place of the two goods.

Question 10

How does the budget line shift?

Answer 10

If the price of both goods changes by same proportion

If there is an increase/decrease in budget

Question 11

Maximization under Constraint

Answer 11

Consumer Problem: want to maximize utility under budget constraint

Question 12

How do you maximize utility under budget constraint?

Answer 12

Indifference curve must be just tangent to the budget line.