L3

Question 1

What are the three distinct steps for understanding consumer theory

Answer 1

1. Consumer preferences
2. Budget constraints
3. Consumer choices

Question 2

What are the three assumptions about consumer preferences?

Answer 2

Completeness - consumers can compare and rank all possible baskets
Transitivity - If they prefer A to B and B to C, they prefer A to C
More is better than less - All goods are desirable

Question 3

What is the indifference curve?

Answer 3

Curve representing all combinations of market baskets that provide a
consumer with the same level of satisfaction

Question 4

What is MRS?

Answer 4

Marginal rate of substitution - Maximum amount of a good that a consumer is willing to give up in order to obtain one additional unit of another good

Question 5

Explain utility and utility function (2 types)

Answer 5

Utility - Numerical score representing the satisfaction that a consumer gets from a given market basket
Utility function - A formula that assigns a level of utility to each market basket.

1. Ordinal utility function
   A ranking of market baskets most to least preferred.
2. Cardinal utility function
   How much one market basket is preferred to another.

Question 6

What is the budget line?

Answer 6

All combinations of goods for which the total amount of money spent is
equal to income

Question 7

When is consumer satisfaction maximized

Answer 7

When the budget line and indifference curve are tangent