Quiz 2 - Consumer Theory Flashcards
The market demand curve is…
The sum of the quantity demanded by each individual at each price.
Diminishing marginal utility is…
An implication of utility theory.
When Ramona is in consumer equilibrium…
a. Her total utility per pound is equal for all goods
b. Any change in prices would make her worse off.
c. She is maximising her utility, given her income and the prices of goods and services.
d. Her total utilities of all goods are equal.
C. She is maximising her utility, given her income and the prices of goods and services.
Budget lines are drawn on a diagram with…
The quantity of one good on the vertical axis and the quantity of another good on the horizontal axis.
The budget line shows the ….
Consumption possibilities of a consumer at a given level of income and prices.
In order to determine a budget line you need to know..
- Allowance eg. £20
- Prices of available goods
Real income equals a household’s income …
in terms of the quantity of goods the household can buy.
Real income takes into consideration..
the effects of inflation on purchasing power.
If an individual’s income increases, what happens to their budget line?
The budget line shifts outward in a parallel manner.
If an individual’s income falls, what happens to their budget line?
The budget line shifts inwards (left) in a parallel manner.
A constant marginal rate of substitution between two goods implies that they are…
Perfect substitutes.
Inferior goods…
When income rises, demand decreases.
-ve elasticity of demand
YED < 0
Normal goods…
When income rises, demand rises.
+ve elasticity of demand.
YED > 0
Luxury goods…
Increased income, leads to bigger percentage increase in demand eg. sports cars.
YED > 1
If the price of a good rises.
The income effect..
Is shown by decreasing income at the new relative price in order to move from the old indifference curve to the new indifference curve after the price change.
