units 1 ....

Question 1

what is a consumption choice set

Answer 1

it is the collection of all consumption choices available to the consumer. Such as : restaurant - choosing the menu.

Question 2

what does x and p represent in a budget constraint

Answer 2

x represents a commodity xn
p represents the price of the corresponding commodity pn

Therefore if we have two goods) (n=2), the price vector is (p1,p2)

Question 3

budget constraint can be represented by what equation

Answer 3

p1x1 + p2x2 is less than or equal to disposable income

So, price multiplied by commodity, summed, is less than or equal to disposable income.

Question 4

rearrange the budget constraint p2x2= m - p1x1 to find (x2)

Answer 4

x2= p1/p2 x X1 + m/p2

Question 5

p1x1 + p2x2 = M

when x1 is equal to 0 what is x2 equal to

Answer 5

m/p2

Question 6

when budget constraint pivots, does income increase?

Answer 6

no it remains constant

Question 7

if asked, what happens when p1’ decreases to p1’’. what do you do?

Answer 7

• you rearrange budget constraint to find out what x1 and x2 equal when the other x1 or x2 is equal to 0

Question 8

what happens to the budget constraint if a tax is added on?

Answer 8

it will shift inwards (less budget)

Question 9

qcan indifference curves intersect (IC) and why yes or why not

Answer 9

no they cannot. As two indifference curves cannot represent the same level of satisfaction, they cannot intersect each other

Question 10

preference relations:

define x and y when there is a:

• strict preference
• weak preference
• indifferent preference

Answer 10

• x is more preferable than y
• x is at least as preferable as y
• x and y are equally preferable.

furthermore, to note the commodity of preference. a squiggle version of > can be used.

Question 11

Explain why convex preferences means that “averages are preferred to extremes”

Answer 11

Because the consumer weakly prefers the weighted average of two bundles to either bundle

Question 12

what is a bad and how is it sloped on a demand curve

Answer 12

a bad is when less of a commodity is always preferred then the commodity is considered a bad

if we have a bundle made up of a good and a bad the slope of the demand curve will be positive. this is because, to reduce a unit of the “bad”, you have to reduce the “good” to be at the same indifferent curve

Question 13

what is a good and how is it sloped on a demand curve

Answer 13

if more of a commodity is always preferred to less then the commodity is known as a good. if every commodity is a good then indifference curves are negatively sloped. because in order to reduce one good you have to increase the other to be indifferent.

Question 14

if consumers always consume comoddties 1 and 2 in flex properprtion (right and left shoe) they are ‘perfect compliments’.

Answer 14

yep

Question 15

a bundle that is strictly preferred to any other is known as…

Answer 15

a satiation point

Question 16

a commodity is known as ‘infinitely divisible’ if?

Answer 16

it can be acquired in any quantity e.g. cheese or water

Question 17

a commodity is known as what if it comes in unit lumps e.g. 1,2,3 so like cars or aircrafts

Answer 17

discrete

Question 18

when is a preference relation ‘well behaved’

Answer 18

if it is both monotonic and convex

Question 19

define monotonicity

Answer 19

more of any commodity is always preferred (ie no satiation and every commodity is a good)

Question 20

convexity

Answer 20

mixtures of bundles are (at least weakly) preferred to the bundles themselves

Question 21

what does mrs measure

Answer 21

marginal rate of substitution measures the rate at which the consumer is willing to choose one product in sacrifice of another

Question 22

dx2/dx1 measures the MRS of substitution of good 1 for good 2, or the slope of the indifference curve

Answer 22

.

Question 23

al indifference curves contain equally preferred bundles. therefore all bundles on the same indifference curve have the same utility level

Answer 23

.

Question 24

how does a good, a bad and a neutral effect utility

Answer 24

A good is a commodity which increases utility with additional consumption

A bad is a commodity that decreases utility with additional consumption

A neutral is a commodity that doesn’t change utility with additional consumption

Question 25

a utility function of the form u(x1,x2) = x1 power of a x2power of b

Answer 25

its called a ‘Cobb- Douglas utility function

shape of downwards sloping L

with a > 0 and b > 0

Question 26

the marginal utility of commodity ‘I’ is?

Answer 26

the rate of change of total utility as the quantity of commodity I consumed changes

Question 27

the marginal rate of substitution can be expressed to derive x1 over x2 to equal positive p1/p2

Answer 27

.

Question 28

what is an ordinary good

Answer 28

this is where the demand for a good always increases as price decreases.

Question 29

what is a giffen good

Answer 29

a giffen good is where the quantity demanded of a good rises as its own price increases then the good is called giffen

Question 30

what is an engel curve

Answer 30

it is a curve that has been plotted with demand agaisnt income

Question 31

what is an inferior good

Answer 31

Inferior goods are goods that see a decrease in demand as income increases. For example, gruel and shacks.

Question 32

on a perfect compliments curve how is the income offer curve/engel curve positioned

Answer 32

through the origin of each of the bundles kinda curve and straight sloped

Question 33

what type of good is it If demand for a good goes up by a greater proportion than income it’s called a ?

Answer 33

luxury good

Question 34

If demand for a good goes up by a lesser proportion than income it’s called a ………. good

Answer 34

necessary good

Question 35

rate of change of demand curve is typically represented by what equation

Answer 35

dx1/dp1 < 0

Question 36

if the demand for good 1 goes up when price of good 2 goes up, we say good 1 is a substitute for good 1. what is the equation for rate of change of a substitute

Answer 36

dx1/dp2 > 0

Question 37

if demand for good 1 goes down when price of good 2 goes up, we say good 1 is a complement to good 2. this can be represented by equation

Answer 37

dx1/dp2 < 0

Question 38

shape of a strictly convex demand curve

Answer 38

curved

Question 39

If X is revealed to be preferred to Y does that automatically mean that X is preferred to Y? and why?

Answer 39

Answer: no
This is because “revealed preferred” just means that X was chosen when Y was affordable;”preference” means that the consumer ranks X ahead of Y.

Question 40

practice all one one question including axiom in notes warp

Answer 40

.

Question 41

what does warp state

Answer 41

This axiom states that given incomes and prices, if one product or service is purchased instead of another, then, as consumers, we will always make the same choice.

Question 42

what is warp used for

Answer 42

It is important to understand that WARP is a condition that must be satisfied by a consumer who is always choosing the best things he or she can afford.

Warp is used to check if the economic entity or consumer is selecting the optimum bundle.

Question 43

what are index numbers used for

Answer 43

Are consumers better or worse off overall as a consequence of price changes: index numbers give approximate answers to such questions.

Question 44

Eugen Slutsky discovered: changes to demand from a price change are always the sum of a pure substitution effect and an income effect.

Answer 44

.

Question 45

This “intermediate” budget line is attempting to hold real income fixed so we can isolate the substitution effect.

Answer 45

.