L2 - Consumer Behaviour

Question 1

Economists think that consumers make 1…… ……. about what they like the most, given their ………..

Answer 1

1 - Rational Decisions

2 - Constraints

Question 2

What is a Consumption Bundle?

Answer 2

Describe any set of goods or services a consumer considers purchasing.

Question 3

What do consumers make decisions based off?

Answer 3

Their preferences

Question 4

What 4 properties do we assume influence all consumer decisions?

Answer 4

1 - Completeness & Rankability
2 - More is better than less, for most goods
3 - Transitivity
4 - The more a consumer has of a particular good, the less willing she is to give up something else to get even more of that good

Question 5

4 Properties that influence consumer decisions - What do we mean by Completeness & Rankability?

Answer 5

Assume that consumers make comparisons across all possible sets of goods.

Question 6

4 Properties that influence consumer decisions - What do we mean by Transitivity?

Answer 6

If a consumer prefers A to B (A > B) and prefers B to C (B > C) then if transitivity applies she must prefer A to C (A > C)
Transitivity applies logical consistency on preferences

Question 7

4 Properties that influence consumer decisions - What do we mean by More is Better than Less?

Answer 7

In general, more of a good thing is good.

Question 8

4 Properties that influence consumer decisions - What do we mean by ‘the more a consumer has of a particular good, the less willing he is to give up something else to get even more of that good’?

Answer 8

Assumes consumers like variety

Question 9

Why do we use a Utility Function?

Answer 9

to describe preferences more simply.

Question 10

Define Utility

Answer 10

Measure of how satisfied a consumer is.

Question 11

Define Utility Function.

Answer 11

• Describes the relationship between what consumers actually consume and their level of satisfaction.
  • Is a way of assigning numbers to bundles of goods so that the bundle with greater utility numbers corresponds to more preferred bundles.

Question 12

Can Utility Functions take a variety of different forms?

Answer 12

Yes, because consumers may have different preferences

Question 13

What is Marginal Utility?

Answer 13

• The extra utility a consumer receives from a 1-unit increase in consumption.

Question 14

On an Indifference Curve we see …

Answer 14

diminishing marginal utility

Question 15

Marginal Utility of consuming equation.

Answer 15

MUx = ΔU / Δx

Key -
Mux - Marginal Utility of X
ΔU - Change in Utility
Δx - Change in X

Question 16

What does the Marginal Rate of Substitution measure?

Answer 16

measures the rate of substitution between goods, keeping the utility level constant, ΔU = 0.

Question 17

What is the Marginal Rate of Substitution equation?

Answer 17

MRSxy = Δy / Δx = −MUx/MUy

Question 18

Can we rank bundles of goods?

Answer 18

Yes

Question 19

Can we compare how much a consumer prefers a good to another?

Answer 19

No, because we cannot quantify preferences.

Question 20

What is ordinal ranking?

Answer 20

states bundles can be ranked from best to worst

Question 21

What is Cardinal ranking?

Answer 21

would allow a person to determine how much better on bundle is, compared to another

Question 22

Why can we not use Cardinal Ranking when looking at bundles?

Answer 22

• There is no real-world measure of how much more a consumer likes the bundle of goods A to the bundle of goods B.

Question 23

Define Perfect Substitutes.

Answer 23

Two goods are perfect substitutes if the consumer is willing to substitute one good for the other at a constant rate.