Indifference Anaylsis

Question 1

Define indifference curve

Answer 1

The IC shows all the combinations that lead to the same level of utility for the consumer

Question 2

What are the properties of the IC curve

Answer 2

Downward sloping
Gets flatter as it goes along (diminishing MRS)
higher ICs preferred
2 ICs can never intersect

Question 3

Define MRS

Answer 3

MRS is the rate at which a person is willing to trade one good for another

Question 4

Define the budget line

Answer 4

The budget line separates the affordable from the unaffordable and shows the rate at which consumers can trade one good for another

Question 5

At what point is optimum consumption

Answer 5

This is the point that gives maximum utility for the consumer given their income (MRS=Px/Py)

Question 6

Define the engel curve

Answer 6

Shows how demand for goods changes with income

Question 7

Define the income effect

Answer 7

Change in consumption that results when a change in price moves consumer to higher/lower IC.
Due to change in real income (change in price)

Question 8

Define the substitution effect

Answer 8

A change in consumption that results when a change in price moves consumer along the IC to a different point of MRS