Price Elasticity of Supply and Consumer Behavior

Question 1

Assumptions of Consumer Theory

OIBN

Answer 1

1. Optimization
2. Information
3. Bundling
4. Non-satiation

Question 2

Assumed that all individuals make consumption decisions with the goal of maximizing their total satisfaction from consuming various goods and services.

Answer 2

Optimization

Question 3

In consumer theory, it doesn’t allow consumers to either spend less than their income (meaning no savings is allowed) or to spend more than their incomes (meaning no borrowing is allowed).

Answer 3

Optimization

Question 4

The basic model of consumer theory seeks to explain how consumers make their purchasing decisions when they are completely informed about all things that matter.

Answer 4

Information

Question 5

The consumer is expected to know all the products and services available.

Answer 5

Information

Question 6

It is assumed that consumers know the prices of the goods and their income during the time period in question.

Answer 6

Information

Question 7

Consumer theory requires that consumers can rank various combinations of goods and services according to the level of satisfaction associated with each combination.

Answer 7

Bundling

Question 8

What do you call the combination of goods?

Answer 8

Consumption Bundles

Question 9

States that consumers must be able to rank the bundles according to the level of satisfaction they would enjoy from consuming the bundles.

Answer 9

Complete

Question 10

What happens when a consumption bundle offers more utility?

Answer 10

It would be ranked higher than another bundle.

Question 11

What happens when two bundles give consumer the exact same amount of utility?

Answer 11

They would have the same ranking and the consumer is said to be indifferent to them.

Question 12

When do you say that the consumer’s preferences are complete?

Answer 12

When a consumer can rank all conceivable bundles of commodities.

Question 13

It means that the consumer’s choices are consistent in the following way:

Bundle A > Bundle B
Bundle B > Bundle C
Bundle A > Bundle C

Answer 13

Transitive

Question 14

Why do consumer preferences must be transitive?

Answer 14

Inconsistent preferences would undermine the ability of consumer theory to explain or predict the bundles consumers will choose.

Question 15

It prevents consumers from being caught in a perpetual cycle where they never make a choice.

Answer 15

Transitive

Question 16

This concept assumes that consumers would always prefer to have more of the good, rather than less.

Answer 16

Non-satiation

Question 17

It implies that if Bundle A has more goods than Bundle B, Bundle A would be preferred.

Answer 17

Non-satiation

Question 18

This is a set of points representing different combinations of goods and services, each providing an individual with the same level of utility.

Answer 18

Indifference Curve

Question 19

Characteristics of an Indifference Curve

Answer 19

1. They are downward sloping.
2. They are convex.
3. They are bowed towards the origin.

Question 20

When more of Good X is added, some of Good Y is taken away to maintain the same level of utility.

Answer 20

Indifference curves are downward sloping.

Question 21

It means that as consumption of Good X is increased relative to consumption of Good Y, the consumer is willing to accept a small reduction in Y for an equal increase in X in order to stay at the same level of utility.

Answer 21

Convex shape

Question 22

Consumers prefer a bit of everything rather than a lot of just one thing.

Answer 22

Bowed towards the origin.

Question 23

Other Concepts in Consumer Theory

Answer 23

• Marginal Utility
• Marginal Rate of Substitution

Question 24

It’s the additional utility that comes from consuming one more unit of a good, holding constant the amounts of all other goods consumed.

Answer 24

Marginal Utility

Question 25

What do economists typically assume as the consumption of a good increases?

Answer 25

That the marginal utility from an additional unit of a good diminishes.

Question 26

What are the two utilities that cannot be plotted on the same graph?

Answer 26

Total Utility and Marginal Utility

Question 27

U is often called as what?

Answer 27

Utils

Question 28

This is a measure of the number of units of Y that must be given up per unit of X added to maintain a constant level of utility.

MRS

Answer 28

Marginal Rate of Substitution

Question 29

It restricts consumer behavior by forcing the consumer to select a bundle of goods that is affordable.

Answer 29

Budget Constraints

Question 30

This is the line showing all bundles of goods that can be purchased at given prices if the entire income is spent.

Answer 30

Budget Line

Question 31

What bundle of goods do we want to find when analyzing consumer choice?

Answer 31

1. Maximizes satisfaction
2. Allows the consumer to live within the budget constraint

Question 32

What are the two conditions that a maximizing bundle must satisfy?

Answer 32

1. Must be on the budget constraint.
2. Must give the consumer the most preferred combination.

Question 33

Applications of Indifference Curves

Answer 33

1. Gifts and Gift Certificates
2. Income and Leisure: Workers
3. Corner Solutions