Section3

Question 1

What is utility in consumer demand theory?

Answer 1

The level of satisfaction derived from the consumption of a product.

Question 2

What is the difference between cardinal and ordinal utility?

Answer 2

• Cardinal Utility: Belief that utility can be measured numerically.
• Ordinal Utility: Utility cannot be measured but ranked based on preferences.

Question 3

What is the budget constraint?

Answer 3

The limit on consumption bundles a consumer can afford based on income.

Question 4

What does the budget line represent?

Answer 4

The budget line shows all combinations of goods that can be bought with a given income.

Question 5

What are indifference curves?

Answer 5

Curves that show consumption bundles giving the consumer the same satisfaction.

Question 6

What are the key assumptions in consumer demand theory?

(4)

Answer 6

• Buyers are rational
• More is preferred to less
• Buyers maximise utility
• Consumers act in self-interest

Question 7

What is the marginal rate of substitution (MRS)?

Answer 7

• The rate at which a consumer is willing to trade one good for another
• Equal to the slope of the indifference curve.

Question 8

What is the income effect?

Answer 8

• Change in consumption due to a price change
• Moving the consumer to a higher or lower indifference curve

I dont understand the first point

Question 9

What is the substitution effect?

Answer 9

• Change in consumption due to a price change
• Moving the consumer along an indifference curve.

Question 10

What does the Engel curve show?

Answer 10

A line showing the relationship between income levels and the demand for a good.

Question 11

What are the main principles of behavioural economics?

(4)

Answer 11

• Bounded rationality
• Bounded willpower
• Bounded selfishness
• Cognitive biases (e.g. loss aversion, status quo bias)