Unit 3 - Consumer decision

Question 1

Utility

Answer 1

The measure of satisfaction or contendness that consumers derive from purchasing a certain quantity of goods. (subjective measure)

Question 2

Basket of goods or bundles of goods

Answer 2

The compilation of certain quantities of one or more goods.

Question 3

When selecting a basket of goods, 3 assumptions are made:

Answer 3

• Completeness: the consumer is able to compare and rank the baskets of goods available for selection.
• Transitivity: if basket A better basket B, and basket B better basket C, we can deduce basket A better than C.
• Unsaturation: basket of goods are assumed to be desiderable, a consumer will always prfere a larger quantity of goods to a smaller one.

Question 4

Indifference curve

Answer 4

Is used to graphically represent all combinations of bundles of goods that provide a consumer with the same degree of satisfaction.

Question 5

Indifference curves reflect consumer preference, 4 points

Answer 5

• Higher lying indifference curves are always preferred (higher level of utility)
• Curves of indifference do not intersect each other
• Indifference curves have a negative slope
• Indifference curves are convex

Question 6

Marginal rate of substitution

Answer 6

The ratio at which a consumer is willing to exchange one good for another.

Give up 20 units of clothing > get 10 of food 20/10 = 2 =marginal rate of substitution

Question 7

Marginal utility

Answer 7

Is the increase in utility that a consumer obtains by consuming an additional unit of a good.

Question 8

Perfect substitute

Answer 8

Two goods for which the indifference curves are linear. (apple juice, orange juice)

Question 9

Perfect complements

Answer 9

Two goods for which the indifference curves are at right angles. (left and right shoes)

Question 10

Budget constrain

Answer 10

The amount of money available to the consumer to purchase product bundles.

Question 11

Budget line

Answer 11

All combinations of goods for which the total amount spend is equal to the budget constrain.

Question 12

Budget quantity

Answer 12

The budget quantity of all bundles of goods that meet the budget constrain. (those below or on the budget line)

Question 13

Budget optimun

Answer 13

Is a person’s consumption decision that maximizes their benefit within a limits of their budget.
Tangent point between the budget line and indifference curve.

Question 14

When a consumer maximizes their utility?

Answer 14

When the marginal rate of substitution is equal to the ratio of the prices of the two goods.

Question 15

Income effect

Answer 15

Is defined as the change in the volume of consumption due to a price-inducted change in the real income of the consumer.

Question 16

Substitution effect

Answer 16

Is a change in the volume of consumption resulting from a change in the relative prices.

Question 17

Price-consumption curve

Answer 17

Is the graphical representation fo the respective benefit-maximizing combinations of the two goods when the price of one changes.