Theory Of Consumer Choice Flashcards

0
Q

What are the assumptions of the standard economic model

A

Buyers are rational
More is preferred to less
Buyers seek to max utility
Consumers act in self interest and don’t consider utility of others

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
1
Q

Standard economic model

A

Theory of consumer choice which examines how consumers facing these trade offs make decisions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is the budget constraint?

A

Limit on the consumption bundles that a consumer can afford

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What the consumer wants: what is the choice set

A

Set of alternatives available to the consumer

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What the consumer wants: indifference curves

A

A curve that shows consumption bundles that give the consumer the same level of satisfaction

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Indifference curves: the axiom of comparison

A

2 bundles of goods, A and B representing consumer choice
Consumer can compare bundles so that A is preferred to B
Or the consumer is indifferent between A and B

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Indifference curves: the axiom of transitivity

A

3 bundles, A, B and C
If consumer prefers A to B, and B to C, then he must prefer A to C
If consumer is indifferent between A and B, and B an C, then he is between A and C

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What are the 4 properties of indifference curves

A

1) higher indifference curves (further right the curve is ) are preferred to lower ones
2) indifference curves are downwards sloping
3) indifference curves do not cross
4) indifference curves are bowed inward

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is the marginal rate of substitution

A

The rate at which a consumer is willing to trade one good for another

MUx/MUy (MU=marginal utility)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What are perfect substitutes?

A

2 goods with straight line indifference curves

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What are perfect compliments

A

2 goods with 90* curves

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is the consumers optimal choice

A

Consumers are constrained by resources available (shown by budget constraint)
- consumer chooses point on budget constraint that lies on highest indifference curve

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What does the MRs equal at optimum

A

MRs=MUx/MUy
And at opt. MRs=Px/Py
So

MUx/MUy = Px/Py

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is the income effect

A

Change in consumption that results when a price change moves the consumer to a higher or lower indifference curve

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Substitution effect

A

Change in consumption that results when a price change moves the consumer along a given indifference curve to a point with a new marginal rate of substitution

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Deriving the demand curve: what is the price-consumption curve

A

A line showing the consumer optimum for 2 goods as the price of 1 changes, assuming incomes and the price of the good are held constant

16
Q

What is the engel curve

A

Line showing relationship between demand and levels of income

17
Q

What is a giffen good

A

Good where an increase in price raises the Qd

18
Q

What is bounded rationality

A

The idea that humans make decisions under the constraints of limits and sometimes unreliable info

19
Q

Why are people not rational

A

They are overconfident
Give too much weight to a small no. Of vivid observations
Reluctant to change their minds
Natural tendency to look for examples which consider their existing view
Use rule of thumb- heuristics

20
Q

What are heuristics

A

Short cuts that people use in decision making

  • anchoring (people start with something familiar)
  • availability (decisions made based on assessment of risks of likelihood something happening)
  • representativeness (judgements by comparing how representative it is to stereotype)
  • persuasion(linked to various attributes that a consumer attaches to a product/brand)
  • Simulation (people use mental processes to establish likely outcome)
21
Q

What is expected utility theory

A

The idea that preferences can and will be ranked by buyers