Lesson 4 Consumer Choice Application

Question 1

Optimum

Answer 1

1) Point where highest indifference curve she can reach intersects her budget
2) slope of indifference curve = marginal rate of substitution
3) slope of budget constraint = relative price of two objects

Question 2

Consumer chooses quantities of two goods so that the

Answer 2

marginal rate of substitution = relative price

Question 3

Relative price vs marginal rate of substitution

Answer 3

1) relative price = rate which market is willing to trade one good for another
2) marginal rate of substitution = rate at which consumer willing to trade one good for another

Question 4

Utility

Answer 4

1) Utility = measure of happiness received from goods
2) Higher indifference curve = more utility
3) Marginal utility = increase in happiness from one additional unit (most objects have diminishing marginal utility –> more u have the less u want)
4) SO consumer’s goal is to maximize utility (be on higher indiff curve)

Question 5

What happens to optimum when income increases

Answer 5

1) Increasing income –> graph shifts outward BUT since cost of goods is same –> slope of new budget constraint is the same
2) Reach a higher indiff curve –> prolly buy more of both goods

Question 6

Normal vs Inferior Good

Answer 6

1) Normal = Want more of good when income rises
2) Inferior = Want less of good when income rises

Question 7

How does optimum shift when prices change

Answer 7

1) Change in prices –> Change slope of budget constraint
2) generally if something becomes cheaper –> may buy more of cheaper thing + less of other object BUT possible they buy more of both

Question 8

Income Effect

Answer 8

1) When you buy more of both goods as a response to decrease in price of one good (then ur income has more purchasing power)

Question 9

Substitution Effect

Answer 9

1) Buy more of reduced cost good (Pepsi) + less of the normal price good (pizza)
2) Opportunity cost of pizza increases since you can get more bottles of pepsi than before

Question 10

How to tell income vs substitution effect graphically

Answer 10

1) Income effect = movement to a new indifference curve (buy more of both goods –> go higher up)
2) Substitution effect = movement along the same indifference curve (buy more cheaper good BUT less of the other good)

Question 11

Bart and Lisa are both optimizing consumers in the markets for shirts and hats, where they pay $100 for a shirt and $50 for a hat. Bart buys 8 shirts and 4 hats, while Lisa buys 6 shirts and 12 hats. From this information, we can infer that Bart’s marginal rate of substitution is

Answer 11

1) 2 for both of them
2) you want relative prices to equal MRS so for 100 dollars you can either get 2 hats or 1 shirt SO MRS should be the same ratio of 2

Question 12

Market

Answer 12

1) Group of buyers and sellers of a good/service
2) Can be highly organized (auction) but most are less organized where the sellers do not congregate in the same place

Question 13

Competitive Market

Answer 13

1) market in which so many buyers/sellers in market that each has little effect on market price

Question 14

Perfectly competitive market

Answer 14

1) goods offered for sale exactly the same
2) so many buyers/sellers that nobody has influence over market price
price takers = buyers can buy as much and sellers can sell as much at market price

Question 15

Monopoly

Answer 15

1) When there is only one seller –> able to set the price

Question 16

Quantity Demanded

Answer 16

1) amount buyers willing/able to purchase
2) price plays the biggest role

Question 17

Law of demand

Answer 17

1) when price rises –> quantity demanded falls
2) when price falls –> quantity demanded rises

Question 18

Demand schedule

Answer 18

1) table that shows relationship btwn price of good + quantity demand

Question 19

Demand Curve

Answer 19

1) Line relating price + quantity demanded
2) slopes downward –> increase in prices results in reduced demand

Question 20

Market Demand

Answer 20

1) sum of individual demands for good or services
2) can calculate by horizontally adding up demand curves

Question 21

Shifts in demand curve

Answer 21

1) Moves right –> when there is an increase in demand (suppose new discovery finds that it helps cure cancer)
2) Moves left –> when there is a decrease in demand (suppose new discovery finds it’s defective)

Question 22

What causes shifts in demand curve

Answer 22

1) Income
2) Substitutes
3) Tastes
4) Expectations
5) # buyers

Question 23

Substitutes

Answer 23

1) two goods for which an increase in the price of one leads to an increase in the demand for the other
2) decrease in ice cream price –> buy more ice cream + less sorbet

Question 24

Complements

Answer 24

1) when reduction in price of one good increases demand for another good
2) example = decrease in price of hot fudge –> buy more ice cream since ice cream and hot fudge is a good combo

Question 25

How do tastes affect demand

Answer 25

1) individual preferences may affect demand
2) economists do not try to explain this
3) like I may really like neopolitan so I buy more of it

Question 26

How do expectations affect demand

Answer 26

1) If you think you are gonna get more money next month –> may spend more this month
2) If you think prices for a good will fall soon, you will be reluctant to buy it in the present

Question 27

How does # buyers affect demand

Answer 27

1) More buyers –> increased quantity demand at every price –> market demand increases

Question 28

Quantity supplied

Answer 28

1) amount that sellers willing/able to sell
2) Direct relationship with price –> more goods cost –> more profitable it is for their business

Question 29

Law of supply

Answer 29

1) When price of good rises –> quantity supplied rises
2) When price of good falls –> quantity supplied falls

Question 30

Supply Schedule

Answer 30

1) Table that shows how much good supplied for each price

Question 31

Supply Curve

Answer 31

1) Curve relating price and quantity supplied
2) slopes upward bc willing to supply more as price increases

Question 32

Market Supply Curve

Answer 32

1) Obtained by adding up individual supply curves horizontally

Question 33

What causes the supply curve to shift

Answer 33

1) Input prices - increase in prices of ingredients to make product –> supply less product
2) Technology - better tech –> more easily make product –> increased supply
3) Expectations –> if anticipate increased prices in future, supply less today leaving some in storage for future
4) # sellers –> more sellers means more supply

Question 34

How does supply curve shift

Answer 34

1) Right –> increase in supply
2) left –> decrease in supply

Question 35

Changes in price of good results in shift or movement on curve

Answer 35

MOVEMENT ON CURVE

Question 36

When do supply/demand curves shift

Answer 36

1) when factor NOT ON AXES changes