Week 2 Flashcards
What is the rationality model?
The rationality model is a framework for understanding and predicting human behavior based on the assumption that individuals aim to maximize their well-being or utility.
What is optimal consumption?
Optimal consumption refers to the consumption choices that an individual makes in order to maximize their utility or well-being.
What is the relation between goods?
Goods can be related to each other in a variety of ways. For example, two goods can be substitutes for each other if one can be used in place of the other, or complements if they are used together.
How do price changes affect consumption?
Price changes can affect consumption in a variety of ways. For example, an increase in the price of a good may cause consumers to reduce their consumption of that good in favor of cheaper substitutes.
What is the marginal utility of a good?
The marginal utility of a good is the additional utility or satisfaction that an individual derives from consuming one additional unit of the good.
What is the law of diminishing marginal utility?
The law of diminishing marginal utility states that as an individual consumes more and more units of a good, the marginal utility or satisfaction derived from each additional unit will eventually decrease.
What is the marginal rate of substitution?
The marginal rate of substitution is the rate at which an individual is willing to trade one good for another in order to maintain a constant level of utility or satisfaction.
What is the indifference curve?
An indifference curve is a graphical representation of the different combinations of two goods that give an individual the same level of utility or satisfaction.
What is the budget constraint?
The budget constraint is a graphical representation of the different combinations of goods that an individual can afford to consume given their income and the prices of the goods.
What is the utility-maximizing consumption bundle?
The utility-maximizing consumption bundle is the combination of goods that an individual chooses to consume in order to maximize their utility or well-being. It is the point where the individual’s indifference curve is tangent to their budget constraint.
