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

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)