Utility Maximum

Question 1

What does the model of consumer choice consist of?

Answer 1

What people want
What people can afford

Question 2

What is constrained optimisation

Answer 2

How we can make ourselves as happy as possible given we can only spend what we earn

Question 3

What is utility

Answer 3

This is used to inform us of how happy or satisfied a consumer is from using a specific product

Question 4

What is marginal utility

Answer 4

Increase in utility the customer gets from consuming an additional unit

Question 5

What is diminishing marginal utility

Answer 5

The satirisation we get from a certain good falling as we consume more of it.

Question 6

What is the law of marginal utility

Answer 6

Each unit we consume gives us less utility to the previous one

Question 7

Finish the sentence:
The indifference curve tells us _____________ ___________ __________ ______

Answer 7

All the combinations of product A and product B that gives us equal levels of utility

Question 8

What are the properties of a indifference curve?
Name 4

Answer 8

1. More preferable than lower ones
   Because consumers prefer to consume more of something than less of something
2. Downwards sloping
3. Never cross
   I
4. Bowed inwards
   Consumer s are willing to trade what they have. A lot of for what they don’t have at all

Question 9

Define marginal rate of substitution?

Answer 9

This is the amount/rate we are willing to trade off one good for another

Question 10

What is diminishing marginal rate of substitution?

Answer 10

MRS is getting smaller as we move along the curve.

Question 11

What is the equation for MRS

Answer 11

MRS X,Y = MUx
_______
MUy
X is on the x axis and y on the y axis