Utility | Indifference curves | Budget Lines

Question 1

Utility

Answer 1

The satisfaction received from consumption

Question 2

Law of Diminishing Marginal Utility

Answer 2

Consumption increases, satisfaction from consumption decreases

Question 3

Equi-Marginal Principle

Answer 3

Consumers maximise utility where their Marginal valuation for each product consumed is the same

Question 4

Budget Line

Answer 4

Combination of two goods that can be purchased with given income at given prices

Question 5

Two causes in shift of budget line

Answer 5

1. Income Effect
2. Substitution Effect

Question 6

Income effect

Answer 6

Following a price change, consumer has higher real income and purchases more

Question 7

Substitution Effect

Answer 7

Following a price change, consumer substitutes to cheaper good

Question 8

Giffen Good

Answer 8

Inferior good; when quantity demanded falls, price falls and quantity demanded increases as price increases

Question 9

Limitations of Indifference curves

Answer 9

1. Consumers have more options to choose from in reality
2. Assumes that consumers act rationally