L1 - Consumer Choice & Demand

Question 1

When it comes to Consumer Preferences what is our primary objective?

Answer 1

To develop an economic model that we can use to explain how consumer make decisions/choices

Question 2

What 2 key factors determine individuals’ choices?

Answer 2

1 - Preferences
• What goods does the consumer like?
2 – Constraints
• How much money do you have, what are the prices of the goods?

Question 3

What are the Comparison Assumptions?

Answer 3

1 - Completeness
2 - Transitivity
3 - More is better

Question 4

Comparison Assumptions - What is Completeness?

Answer 4

Consumer can compare goods and rank them based on their preferences

Question 5

Comparison Assumptions - What is Transitivity?

Answer 5

• Holding consistent rankings of bundles
  
  • If an individual prefers bundle A to bundle B & he also prefers bundle B to bundle C, then if transitivity is applied he must also prefer bundle A over bundle C.

Question 6

Comparison Assumptions - What is More is Better?

Answer 6

For most goods, more is better than less

Question 7

Why do we use Indifference Curves?

Answer 7

to model consumer preferences, to describe an individual’s willingness to trade one bundle for another.

Question 8

If a consumer prefers good A to good B, then which good will he receive more utility from consuming?

Answer 8

Good A

Question 9

If a consumer is indifferent to good A and good B, which will he prefer to consume?

Answer 9

Neither, because he is Indifferent he will receive the same amount of satisfaction from consuming both goods.

Question 10

What do Indifference Curves show us?

Answer 10

All the combinations of consumption bundles, that will provide the consumer with the equal level of satisfaction (utility)

Question 11

What are the 4 characteristics of Indifference Curves?

Answer 11

1 - They can be drawn
2 - Consumers prefer higher Indifference Curves
3 - Indifference curves never cross
4 – Diminishing Marginal Returns of a Good

Question 12

4 Characteristics of Indifference Curves - They can be drawn.

Answer 12

Satisfies the consumer preference assumption of completeness.

Question 13

4 Characteristics of Indifference Curves - Prefer higher Indifference Curves.

Answer 13

Satisfies the consumer preference assumption of More is Better.

Question 14

4 Characteristics of Indifference Curves - Curves never cross.

Answer 14

Satisfies the consumer preference assumption of Transitivity.

Question 15

4 Characteristics of Indifference Curves - Diminishing Marginal Returns of a Good.

Answer 15

• The more a consumer has of a certain good, the less they are willing to give up of something else to get more of that good.

Question 16

What does the Marginal Rate of Substitution show us?

Answer 16

Tells us how willing an individual is to give up one good for another good.

Question 17

The slope of an Indifference Curve is the ….

Answer 17

Marginal Rate of Substitution (MRS)

Question 18

What is the Equation for MRS

Answer 18

MRS = (Change in Y) / (Change in X)

Question 19

What does the equation for MRS (Change in Y / Change in X) tell us?

Answer 19

Describes the rate at hich an individual is willing to trade off or substitute exactly 1 unit of good X for more of good Y, without reducing Utility.

Question 20

What does the steepness of the Indifference Curve imply about consumer preferences?

Answer 20

Steeper Curves - Imply consumer is willing to give up a lot of good Y to get one unit of good X.
Flatter Curves - Imply the consumer would require a large increase in good X to give up one unit of good Y.

Question 21

Generally, a well-behaved indifference curve exhibits …

Answer 21

Diminishing Marginal Rate of Substitution

Question 22

What does the shape of the Indifference Curve inform us about?

Answer 22

The relationship between the products

Question 23

Relationship between products - What kind of product relationship does a straight indifference curve show us?

Answer 23

Shows that these goods are substitutes.

Question 24

Relationship between products - What kind of product relationship does an indifference curve that is convex towards the origin show us?

Answer 24

Shows us that the goods are more complimentary to each other

Question 25

For a Perfect Substitute Indifference Curve MRS is …

Answer 25

Constant

Question 26

For perfect compliments individuals consume these in …

Answer 26

Constant Proportion

Question 27

What does Constrained Optimisation mean?

Answer 27

Is when consumers try to make the best decisions (optimisation) given the constraints they face such as the price (constraint) of a good.

Question 28

Define Consumption Bundle.

Answer 28

A set of goods or service a consumer considers purchasing

Question 29

Define Utility Function.

Answer 29

Is a mathematical function that describes the relationship between what consumer actually consume and their level of well-being.