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EC 260 > Lesson 1.2 - Consumer Behaviour and Rational Choice (Chp 3) > Flashcards

Lesson 1.2 - Consumer Behaviour and Rational Choice (Chp 3) Flashcards

1
Q

what does consumer well being arise from?

A

arising from goods they choose to purchase with the income they have

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2
Q

assumption in indifference curves

A

a consumer has a choice of 2 goods to purchase, Y and X

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3
Q

what is an indifference curve?

A

Contains points representing market bundles among which the consumer is indifferent

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4
Q

indifference curve graph

A

Y axis is amount of product Y, X axis is amount of product X; decreasing with increasing slope

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5
Q

3 things to remember with indifference curves

A
  1. A consumer has many indifference curves.
  2. Indifference curves slope downwards and to the right which assumes that an individual will always prefer more of a commodity to less.
  3. An individual consumer’s indifference curves cannot intersect one another.
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6
Q

what would be contradicted if indifference curves intersected?

A

that consumers would always prefer more of a good to less

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7
Q

what bundle does a consumer prefer on the same indifference curve

A

all bundles provide same utility

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8
Q

what bundle on what indifference curve does a consumer prefer?

A

the one farthest from the origin

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9
Q

define marginal rate of substitution

A

number of units of Y product that must be given up to receive an additional unit of product X while maintaining the same level of satisfaction and well-being

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10
Q

MRS formula **

A

=-1*(slope of indifference curve) = dY/dX = (dU/dx)/(dU/dY) = MUx/MUy

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11
Q

MRS when indifference curve is steep (large slope)

A

high MRS I.E a consumer is willing to sacrifice a lot of Y product for little extra X product

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12
Q

MRS when indifference curve is flat (small slope)

A

low MRS I.e. a consumer is willing to sacrifice a lot of X product for a little extra Y product

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13
Q

what does an indifference curve show?

A

consumer’s tastes and preferences

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14
Q

what is utility?

A

happiness or satisfaction that a person derives from consumption of a good or service

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15
Q

what are indifference curves also called?

A

iso-utility curves

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16
Q

what is MUy

A

marginal utility of product Y; the increase in utility consumer would experience if they were to obtain one more unit of product Y, holding product X constant

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17
Q

what determines if an indifference curve is attainable?

A

dependant on consumer’s income and product prices

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18
Q

what does a budget constraint line show?

A

the combinations of market bundles he/she can purchase given his/her income and prevailing market prices.

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19
Q

Budget Line formula

A

Yprice of Y + Xprice of X = I where I is consumer’s level of income

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20
Q

budget line graph

A

downward with constant slope; axis Y is amount of product Y, axis X is amount of product X

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21
Q

when will a budget line shift?

A

if there is a change in consumer income or product prices

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22
Q

budget line of consumer income increases

A

parallel shift up and to the right

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23
Q

budget line if consumer income decreases

A

parallel shift down and to the left

24
Q

budget line if decrease in price of Y

A

pivot upwards with x point constant

25
Q

budget line if decrease in price of X

A

pivot upwards with y point constant

26
Q

what does equilibrium market bundle show?

A

market bundle that maximizes consumer’s utility given budget

27
Q

what market bundles can a consumer choose?

A

those that are on the budget line

28
Q

when is utility maximized formula?

A

when MRS = Price Ratio = Px/Py
when rate consumer is willing to substitute X for Y holding utility constant is equal to rate consumer is able to substitute X for y
when MUx/Px = MUy/y

29
Q

explain corner solution

A

market bundle contains only 1 good; when budget line touches highest possible indifference curve on an axis; then MRS does not equal price ratio when utility is maximized

30
Q

what does an MRS = Px/Py of 4 mean?

A

consumer is willing (MRS) and must (price ratio) give up 4 of Y to get 1 more of X

31
Q

what happens when MRS > Px/Py ex. when MRS = 4 and Price ratio = 3

A

Consumer can give up 3 Y for an extra X, but an extra X is worth 4 Y, so consumer will buy more of X and less of Y - substitute X for Y

32
Q

what happens when MRS < Px/Py, ex. when MRS = 4 and price ratio = 5

A

Consumer can give up 5 Y for an extra X, but an extra X is worth 4 Y, so consumer will buy more of Y and less of X - substitute Y for X

33
Q

derive market demand curve

A

horizontal sum of all of the individual consumer demand curves; for each price point, all of the individual demands are added up to get the total quantity demanded at that price.

34
Q

what happens to market demand curve when more consumers enter the market?

A

market demand curve is pushed to the right due to horizontal summation, as this occurs as as the supply curve remains constant, the market price increases

35
Q

explain consumer surplus

A

the difference between what an individual is willing to pay (the person’s reservation price) and what that individual has to pay (the market price) for a product.

36
Q

what does demand curve tell us about consumer surplus?

A

for quantities higher than X, consumer is willing to pay more

37
Q

consumer reservation price/willingness to pay

A

price at which a consumer values each particular number of units of a good; highest price consumer is willing to pay

38
Q

what happens if a higher price than reservation price/WTP is charged?

A

consumer would not buy

39
Q

formula for consumer surplus

A

what consumer actually pays (market price) - what consumer would be willing to pay = actual price paid - reservation price

40
Q

on demand curve, where is consumer surplus?

A

triangular area below demand curve and above market price line

41
Q

what is price discrimination

A

charging higher prices to consumers who value the product more highly

42
Q

at equilibrium, what does MRS describe?

A

the number of units of one good that a consumer is willing to trade for an additional unit of another good, holding utility fixed

43
Q

L shaped indifference curve

A

for goods that are perfectly complementary, can’t have 1 good without the other since MRS = 0

44
Q

decreasing indifference curve with constant slope

A

goods that are perfect substitutes since MRS = 1 and is constant

45
Q

what is the slope of the budget line?

A

the price ratio = -Px/Py

46
Q

where is the equilibrium market bundle on the graph?

A

where budget line is tangent to the highest feasible indifference curve or at a corner solution

47
Q

how can managers change consumer choices?

A

by influencing preferences through advertising strategies and by influencing the budget line through pricing strategies.

48
Q

when is a coupon good for a consumer?

A

it is enables the budget line to increase so it is tangent to an indifference curve further from the origin

49
Q

budget line with a coupon for $18 if you spend $180 on groceries with x axis is groceries and y axis clothing

A

when budget line hits groceries = 180, the budget line goes straight up for 18 units and then continues with normal slope downwards

50
Q

how to tell if a coupon was a good idea for managers?

A

if groceries with the coupon with the higher budget line and the indifference curve minus the original groceries is larger than the coupon

51
Q

do most individuals prefer a cash gift and why?

A

yes, it increases their budget line outward if the x axis is one good and the y axis is all other goods

52
Q

when is market demand the same as firm demand?

A

in a monopoly only because there is only 1 seller

53
Q

what happens to buyers who pay a price equal to the reservation price?

A

they do not capture any consumer surplus

54
Q

what does consumer surplus measure?

A

the efficiency of markets and social benefits of market transactions

55
Q

how many managers capture consumer surplus?

A

charging different prices to individuals or groups of individuals that are closer to their reservation prices.

EC 260 (11 decks)

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