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

Question 1

what does consumer well being arise from?

Answer 1

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

Question 2

assumption in indifference curves

Answer 2

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

Question 3

what is an indifference curve?

Answer 3

Contains points representing market bundles among which the consumer is indifferent

Question 4

indifference curve graph

Answer 4

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

Question 5

3 things to remember with indifference curves

Answer 5

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.

Question 6

what would be contradicted if indifference curves intersected?

Answer 6

that consumers would always prefer more of a good to less

Question 7

what bundle does a consumer prefer on the same indifference curve

Answer 7

all bundles provide same utility

Question 8

what bundle on what indifference curve does a consumer prefer?

Answer 8

the one farthest from the origin

Question 9

define marginal rate of substitution

Answer 9

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

Question 10

MRS formula **

Answer 10

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

Question 11

MRS when indifference curve is steep (large slope)

Answer 11

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

Question 12

MRS when indifference curve is flat (small slope)

Answer 12

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

Question 13

what does an indifference curve show?

Answer 13

consumer’s tastes and preferences

Question 14

what is utility?

Answer 14

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

Question 15

what are indifference curves also called?

Answer 15

iso-utility curves

Question 16

what is MUy

Answer 16

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

Question 17

what determines if an indifference curve is attainable?

Answer 17

dependant on consumer’s income and product prices

Question 18

what does a budget constraint line show?

Answer 18

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

Question 19

Budget Line formula

Answer 19

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

Question 20

budget line graph

Answer 20

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

Question 21

when will a budget line shift?

Answer 21

if there is a change in consumer income or product prices

Question 22

budget line of consumer income increases

Answer 22

parallel shift up and to the right

Question 23

budget line if consumer income decreases

Answer 23

parallel shift down and to the left

Question 24

budget line if decrease in price of Y

Answer 24

pivot upwards with x point constant

Question 25

budget line if decrease in price of X

Answer 25

pivot upwards with y point constant

Question 26

what does equilibrium market bundle show?

Answer 26

market bundle that maximizes consumer's utility given budget

Question 27

what market bundles can a consumer choose?

Answer 27

those that are on the budget line

Question 28

when is utility maximized formula?

Answer 28

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

Question 29

explain corner solution

Answer 29

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

Question 30

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

Answer 30

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

Question 31

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

Answer 31

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

Question 32

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

Answer 32

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

Question 33

derive market demand curve

Answer 33

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.

Question 34

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

Answer 34

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

Question 35

explain consumer surplus

Answer 35

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.

Question 36

what does demand curve tell us about consumer surplus?

Answer 36

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

Question 37

consumer reservation price/willingness to pay

Answer 37

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

Question 38

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

Answer 38

consumer would not buy

Question 39

formula for consumer surplus

Answer 39

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

Question 40

on demand curve, where is consumer surplus?

Answer 40

triangular area below demand curve and above market price line

Question 41

what is price discrimination

Answer 41

charging higher prices to consumers who value the product more highly

Question 42

at equilibrium, what does MRS describe?

Answer 42

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

Question 43

L shaped indifference curve

Answer 43

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

Question 44

decreasing indifference curve with constant slope

Answer 44

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

Question 45

what is the slope of the budget line?

Answer 45

the price ratio = -Px/Py

Question 46

where is the equilibrium market bundle on the graph?

Answer 46

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

Question 47

how can managers change consumer choices?

Answer 47

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

Question 48

when is a coupon good for a consumer?

Answer 48

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

Question 49

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

Answer 49

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

Question 50

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

Answer 50

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

Question 51

do most individuals prefer a cash gift and why?

Answer 51

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

Question 52

when is market demand the same as firm demand?

Answer 52

in a monopoly only because there is only 1 seller

Question 53

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

Answer 53

they do not capture any consumer surplus

Question 54

what does consumer surplus measure?

Answer 54

the efficiency of markets and social benefits of market transactions

Question 55

how many managers capture consumer surplus?

Answer 55

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