the rational consumer Flashcards
1
Q
A
2
Q
define utility
A
- value or satisfaction from consumption
3
Q
define marginal utility
A
the change in the utility from consuming an additional unit
4
Q
define diminishing marginal utility
A
- additional unit of good adds less utility than the prevous one
5
Q
A
6
Q
how do you calculate the marginal utility
A
- you see the difference beteen the previous utility
7
Q
how do you compare MU to price
A
–> finf the marginal utility per dollar
- do this by dividing MU/P
8
Q
how to optimixe total utility
A
–> consumer llocated insome somarginal utility per dollar is equal for all purchases
MUA/PA= MUB/PB=MUZ/PZ
9
Q
define a budget constraint
A
-cost of consumption of bundle cant exceed income
10
Q
define consumption possibilities
A
- all bundles that consumer can afford
11
Q
A
12
Q
define budget line
A
-graph representation of all the goods consumer can buy if he spend all his income
13
Q
define the optimal consumption bundle
A
- consumption bundle that maximises total utility given gudget constratint
14
Q
describe the substitution effect
A
- when price of something changes you choose the cheaper option
15
Q
describe the income effect
A
- how changes in price impacr how much people pay due to purchasing power changes.
- normal goods–> expensive
-if there os higher income–> people buy more - lower income–> people buy less
- inferior goods
- id there is higher income–> buy less
- if there is lower income–> buy more.
