Lecture 4 (Consumer choice) Flashcards
1
Q
Budget constraint meaning
A
consumer can’t spend more than their income
2
Q
Budget line meaning
A
Maximal affordable consumption bundles using all the income
3
Q
Substitution effect of a price change meaning
A
Substitution of the good that is now relatively cheaper in place of the other good
4
Q
Income effect meaning
A
Change in consumption caused by the change in purchasing power after a price change
5
Q
Expected value meaning
A
Weighted average of all possible outcomes, where weights are the probabilities
6
Q
Expected value formula
A
EV = P1x + P2y
(P1 - probability of bad event, x - bad event payoff, P2 - prob. of good event, y - good event payoff)
7
Q
Fair insurance policy meaning
A
when insurance premium = expected value of loss
