L2 Consumer Choice

Question 1

Premises of consumer behaviour

Answer 1

Individual tastes/preferences determine the amount of pleasure people derive from goods and services they consume.
Consumers face constraints or limits on their choices.
Consumers maximise well-being or pleasure from consumption, subject to constraints they face,
Consumers make emotionless decisions.

Question 2

Completeness

Answer 2

When facing a choice between any 2 bundles of goods, consumers can rank them so they either prefer one or the other or is indifferent between them

Question 3

Transitivity

Answer 3

Consumer’s preferences over bundles is consistent in the sense that consumer weakly prefers bundle A to bundle B and weakly prefers bundle B to bundle C. This means the consumer also weakly prefers bundle A to bundle C.

Question 4

More is better

Answer 4

Ceteris paribus, more of a commodity is better than less of it.

Question 5

Good

Answer 5

A commodity for which more is preferred to less

Question 6

Bad

Answer 6

Something for which less is preferred to more

Question 7

Indifference curve

Answer 7

Set of all bundles of goods that a consumer views as being equally desirable

Bundles on indifference curves farther from origins are preferred to those on indifference curves closer to the origin

Mostly convex to origin

Question 8

Marginal rate of substitution

Answer 8

Max amount of one good a consumer will sacrifice to obtain one more unit of another good

Delta y over delta x is equal to the slope of the indifference curve

MRS approached zero as we move down and to the right along an indifference curve

Question 9

Perfect substitutes

Answer 9

Goods that a consumer is completely indifferent as to which to consume

Question 10

Perfect complements

Answer 10

Goods that a consumer is interested in consuming only in fixed proportions

Question 11

Utility

Answer 11

Set of numerical values that reflect the relative rankings of various bundles of goods

Question 12

Utility function

Answer 12

The relationship between utility values and every possible bundle of goods

Question 13

Marginal utility

Answer 13

Extra utility that consumer gets from consuming the last unit of a good

Question 14

Marginal utility

Answer 14

Extra utility that consumer gets from consuming the last unit of a good

Slope of utility function

Question 15

Ordinal vs cardinal

Answer 15

Ordinal: relative ranking
Cardinal: absolute ranking

Question 16

Budget line/constraint

Answer 16

Bundles of goods that can be bought if entire budget is spent on those goods at given prices.

Question 17

Opportunity set

Answer 17

All bundles a consumer can buy, including all bundles inside budget constraint and on budget constraint

Question 18

Marginal rate of transformation

Answer 18

• price of Z over price of B

Question 19

Optimal bundle

Answer 19

Bundle out of all bundles that he can afford that gives her the most pleasure

Occurs when budget constraint and indifference curve have the same slope where they touch.

Occurs when MRS = MRT

Question 20

Endowment effect

Answer 20

People place higher value on a good if they own it than they do if they are considering buying it

Consumer choice theory assumes a consumer’s endowment does not affect the indifference curve map

Experience reduces endowment effect significantly

Seller often wants higher price than consumers

Question 21

Bounded rationality

Answer 21

People have limited capacity to anticipate, solve complex problems or enumerate all options

Question 22

Tax salient

Answer 22

Awareness of a tax; people will buy less of a good with a high sales tax