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Micro economics > Exam 3 > Flashcards

Exam 3 Flashcards

1
Q

theory of consumer behavior

A

description of how consumers allocate incomes among different goods and services to maximize their well-being

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2
Q

steps of consumer behavior

A
  1. consumer preferences
  2. budget constraints
  3. consumer choices
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3
Q

market basket (bundle)

A

list with specific quantities of one or more goods

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4
Q

basic assumptions about preferences

A
  1. completeness
  2. transitivity
  3. more is better than less
  4. diminishing marginal rate of substitution
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5
Q

indifference curve

A

curve representing all combinations of market baskets that provide a consumer with the same level of satisfaction

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6
Q

indifference map

A

graph containing a set of indifference curves showing the market baskets among which a consumer is indifferent

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7
Q

indifference curves cannot intersect, why?

A

then one of the assumptions of consumer theory is violated (transitivity)

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8
Q

marginal rate of substitution (MRS)

A

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

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9
Q

convex indifference curve

A

occurs when MRS diminished along an indifference curve

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10
Q

perfect substitutes

A

two goods for which the MRS of one for the other is a constant (always indifferent between one and the other)

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11
Q

perfect complements

A

two goods for which the MRS is zero or infinite, the indifference curves are right angles (an additional 1 give no extra satisfaction unless also an extra 1 of the other)

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12
Q

bad

A

good for which less is preferred rather than more

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13
Q

utility

A

numerical score representing the satisfaction that a consumer gets from a given market basket

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14
Q

utility function

A

formula that assigns a level of unity to individual market baskets

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15
Q

ordinal utility function

A

utility function that generates a ranking of market baskets in order of most to least preferred

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16
Q

cardinal utility function

A

utility function describing by how much one market basket is preferred to another

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17
Q

budget constraints

A

constraints that consumers face as a result of limited incomes

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18
Q

budget line

A

all combinations of goods for which the total amount of money spent is equal to income

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19
Q

I=

A

PfF+PcC

price of food)x(food quantity) + (price of clothes)x(clothes

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20
Q

effects of income changes on budget line

A

shifts parallel to original line
income increase- outward shift
income decrease- inward shift

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21
Q

effects of price change on the budget line

A

budget line rotates around the intercept (point that hits x or y line)
price decrease- rotate outward
price increase- rotate inward

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22
Q

conditions to maximize market basket

A
  1. located on the budget line

2. give consumer the most preferred combination of goods/services

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23
Q

satisfaction is maximized at what point (equation)

A

MRS= Pf/Pc

marginal rate of substitution= price of food/ price of clothes

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24
Q

marginal benefit

A

benefit from the consumption of oone additional unit of a good, measured by MRS

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25
Q

marginal cost

A

cost of one additional unit of a good

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26
Q

satisfaction is maximized at what point

A

when the marginal benefit is equal to the marginal cost

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27
Q

corner solution

A

situation in which the marginal rate of substitution for one good in a chosen market basket is not equal to the slope of the budget line

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28
Q

how will the consumer maximize their satisfaction in a corner solution

A

consume only one of the goods

29
Q

marginal utility (MU)

A

additional satisfaction obtained from consuming one additional unit of a good

30
Q

diminishing marginal utility

A

principle that as more of a good is consumed, the consumption of additional amounts will yield smaller additions to utility

31
Q

equal marginal principle

A

principle that utility is maximized when consumer has equalized the marginal utility per dollar of expenditure across all goods

32
Q

MUf/MUc=

A

Pc/Pf

33
Q

cost-of-living index

A

ratio of the present cost of a typical bundle of consumer goods and services compared with the cost during a base period

34
Q

ideal cost-of-living index

A

cost of attaining a given level of utility at current prices relative to the cost of attaining the same utility at base-year prices

35
Q

price index

A

represents the cost of buying bundle A at current prices relative to the cost of bundle A at base-year prices, overstates the ideal cost-of-living index

36
Q

laspeyres price index

A

amount of money at current year prices that an individual requires to purchase a bundle of goods and services chosen in a base year divided by the cost of purchasing the same bundle at base-year prices

37
Q

ideal cost-of-living vs laspeyres

A

laspeyres is greater than the ideal cost-of-living index, it overcompensates for the higher cost-of-living

38
Q

paasche index

A

amount of money at current-year prices that an individual requires to purchase a current bundle of goods and services divided by the cost of purchasing the same bundle of goods and services divided by the cost of purchasing the same bundle in a base year

39
Q

laspeyres vs paasche

A

laspeyres overstates the ideal cost-of-living, whereas paasche understates because it assumes that the individual will buy the current-year bundle in the base period

40
Q

fixed-weight index

A

cost-of-living index in which the quantities of goods and services remain unchanged

41
Q

chain-weighted price index

A

cost-of-living index that accounts for changes in quantities of goods and services

42
Q

price-consumption curve

A

curve tracing the utility-maximizing combinations of two goods as the price of one changes

43
Q

individual demand curve

A

curve relating the quantity of a good that a single consumer will buy to its price

44
Q

properties of the individual demand curve

A
  1. the level of utility that can be attained changes as we move along the curve
  2. at every point on the demand curve, the consumer is maximizing utility by satisfying the condition that the marginal rate of substitution (MRS) of food for clothing equals the ratio of the prices of food and clothing
45
Q

income-consumption curve

A

curve tracing the utility-maximizing combinations of two goods as a consumer’s income changes

46
Q

engel curve

A

curve relating the quantity of a good consumed to income

47
Q

two goods are substitutes if

A

an increase in the price of one leads to and increase in the quantity demanded of the other

48
Q

two goods are complements if

A

an increase in the price of one good leads to a decrease in the quantity demanded of the other

49
Q

two goods are independent if

A

a change in the price of one good has no effect on the quantity demanded of the other

50
Q

effects of a fall in the price of a good

A
  1. substitution effect

2. income effect

51
Q

substitution effect

A

consumers will tend to buy more of the good that has become cheaper and less of those goods that are now relatively more expensive; change in consumption of a good associated with a change in its price, with the level of utility held constant

52
Q

income effect

A

because one of the goods is now cheaper, consumers enjoy an increase in real purchasing power; change in consumption of a good resulting from an increase in purchasing power, with relative prices held constant

53
Q

total effect=

A

substitution effect + income effect

54
Q

something is an inferior good if

A

the income effect is negative (exception: giffen good)

55
Q

giffen good

A

a good whose demand curve slopes upward because the (negative) income effect is larger than the substituion effect

56
Q

market demand curve

A

curve relating the quantity of a good that all consumers in a market will buy to its price

57
Q

fun facts about the market demand curve

A
  1. curve will shift to the right as more consumers enter the market
  2. factors that influence the demands of many consumers will also affect market demand
58
Q

price elasticity of demand (Ep)=

A

(change in Q/Q) / (change in P/P)

59
Q

inelastic demand

A

the quantity demanded is relatively unresponsive to changes in price; total expenditure on the product increases when the price increases

60
Q

elastic demand

A

quantity demanded is responsive to change in price; total expenditure on the product decreases as the price goes up

61
Q

isoelastic demand curve

A

demand curve with a constant price elasticity; total expenditure is constant along the demand curve

62
Q

speculative demand

A

demand driven not by the direct benefits one obtains from owning or consuming a good but instead by an expectation that the price of the good will increase

63
Q

consumer surplus

A

difference between what a consumer is willing to pay for a good and the amount actually paid; the area under the demand curve and above the line representing the purchase price of the good

64
Q

network externality

A

when each individual’s demand depends on the purchases of other individuals

65
Q

positive network externality

A

the quantity of a good demanded by a typical consumer increases in response to the growth in purchases of other consumers

66
Q

negative network externality

A

the quantity demanded of a good by a typical consumer decreases in response to the growth in purchases of other consumers

67
Q

bandwagon effect

A

effect of positive network externality in which a consumer wishes to possess a good in part because others do

68
Q

snob effect

A

effect of negative network externality in which a consumer wishes to own an exclusive or unique good

Micro economics (4 decks)

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