micro lecture 1

Question 1

Indifference curve

Answer 1

curve representing all combinations of consumption bundles that provide a consumer with the same level of satisfaction or utility

Question 2

preference ordering, 5 key types

Answer 2

completeness
transitivity
more is better (nonsatiation)
continuity
convexity

Question 3

PROPERTIES OF (WELL-BEHAVED) INDIFFERENCE CURVES?

Answer 3

• there is an indifference curve passing through every possible consumption bundle
• indifference curves are downward-sloping
• higher indifference curves are associated with a higher level of utility
• indifference curves cannot intersect
• indifferences curves are convex to the origin

Question 4

marginal rate of substitution formula

Answer 4

change in y/change in x, they usually decrease the further down an indifference curve you go

Question 5

diminishing MRS =

Answer 5

The greater of good X a consumer has the more they are willing to give up to to obtain an additional unit of good Y

Question 6

utility

Answer 6

is the level of satisfaction that a consumer gets from a given consumption bundle

Question 7

marginal utility =

Answer 7

measures the slope of the utility function; it is the partial derivative of the utility function U:〖𝑀𝑈_𝑥 = 𝜕𝑈/𝜕𝑥, 〖𝑀𝑈〗_𝑦=𝜕𝑈/𝜕𝑦

Question 8

the budget constraint

Answer 8

us what the individual can afford, given prices and their income

Question 9

given their preferences and budget constraints, how do consumers choose which bundle to consume?

Answer 9

they choose the bundle that will maximise their utility, given their budget constraint – this is the best affordable bundle

Question 10

so the utility maximising bundle must…

Answer 10

• must be located on the budget line - it must be affordable
• must give the consumer the most preferred combination of goods and services – so it must be on the highest attainable indifference curve

Question 11

Utility is maximised where:

Answer 11

Mux/px=Muy/py

So utility is maximised when the budget is allocated so that the marginal utility per pound of expenditure is the same for each good

Question 12

corner solution

Answer 12

a consumer maximises utility by consuming only one of the two goods

Question 13

in-kind transfers

Answer 13

transfers that are tied to the consumption of a particular good or service (e.g. public housing, housing benefit, food stamps, child benefit)

Question 14

cash transfers

Answer 14

direct transfer payments of money to eligible individuals that are not required to be spent on a specific good or service (e.g. pensions, unemployment benefits)