topic 4 - consumer choice

Question 1

the goal of consumer choice

Answer 1

maximise utility while staying within budget

Question 2

consumers decide how much of each good to buy by balancing

Answer 2

preferences and budget constraint

Question 3

at the optimal choice the indifference curve is where

Answer 3

tangent to the budget line

Question 4

what happens when MRS does not equal price ratio

Answer 4

the optimal bundle is at one of the corners of the budget line, e.g. if consumer only buys one good

Question 5

substitution effect

Answer 5

the consumer substitutes toward the cheaper good, if apples become cheaper you buy more apples and fewer oranges

Question 6

income effect

Answer 6

the price change makes the consumer feel richer if prices fall or poorer if prices rise

Question 7

perfect substitutes

Answer 7

the optimal bundle is determined by cheaper good

Question 8

perfect complements

Answer 8

goods are always consumed together in fixed proportions

Question 9

quasilinear preferences

Answer 9

utility is linear in one good and nonlinear in other