Households

Question 1

Budget Set

Answer 1

(a consumer’s feasible set) all combinations attainable at a certain income

Question 2

Slope of budget line

Answer 2

price ratio (px/py)

Question 3

Optimal Choice (two products)

Answer 3

MRT = price ratio (px/py)

Question 4

Income effect (price change)

Answer 4

A change in price changes the consumer’s real income which influences their purchasing behavior

Question 5

Substitution effect (price change)

Answer 5

A change in price of one good changes the consumer’s demand for that good because of the presence of another good

Question 6

Normal good (income change)

Answer 6

Demand increases as income increases

Question 7

Inferior good (income change)

Answer 7

Demand decreases as income increases

Question 8

Law of demand

Answer 8

The higher the price of a good the lower the demand of that good

Question 9

Optimal choice (leisure and work)

Answer 9

MRS = -w

Question 10

Wage rate

Answer 10

Opportunity cost of leisure

Question 11

Factors influencing a household’s savings decision

Answer 11

1. Precautionary
2. Retirement planning
3. Major purchase when borrowing is difficult
4. Forced (pandemic)

Question 12

Interest rate

Answer 12

Opportunity cost of consumption today