week 2

Question 1

utility

Answer 1

A numeric measure of a person’s happiness

Question 2

utility function

Answer 2

a way of assigning a number to every possible consumption bundle in a way that more preferred bundles get larger numbers than less preferred ones

Question 3

indifference map

Answer 3

the collection of all indifference curves for a given preference relation

Question 4

utility function for perfect substitutes

Answer 4

u(x1, x2) = ax1 + bx2

Question 5

utility function for perfect complements

Answer 5

u(x1, x2) = min{ax1, bx2}

Question 6

Cobb-Douglas

Answer 6

u(x1, x2) = xc1*xd2
- where c and d are positive numbers that describe the preferences of the
consumer

Question 7

marginal utility

Answer 7

the added satisfaction that a consumer gets from having one more unit of a good or service

Question 8

marginal utility function

Answer 8

∆U = MU1*∆x1

Question 9

using a utility function to measure MRS

Answer 9

M RS = ∆x2 / ∆x1 = − MU1 / MU2

Question 10

optimal choice

Answer 10

best bundle that the consumer can afford

Question 11

demand function

Answer 11

gives the optimal amounts of
each of the goods as a function of the prices and income faced by
the consumer

Question 12

comparative statics

Answer 12

tudying how choice responds to changes in the
economic environment

Question 13

normal good

Answer 13

he quantity demanded for it increases when income increases, and decreases when income decreases

Question 14

inferior good

Answer 14

An increase of income results in a reduction in the consumption of the good

Question 15

income offer curve

Answer 15

llustrates the bundles of goods that are demanded at the different levels of income

Question 16

engel curve

Answer 16

ocuses on 1 good and graphs the demand for one of the goods as a function of income, with all prices being held constant

Question 17

Giffen good

Answer 17

a non-luxury product for which demand increases as the price increases and vice versa, thus defying standard laws of demand

Question 18

price offer curve

Answer 18

represents the bundles that would be demanded at different level of p1

Question 19

demand curve

Answer 19

focuses on good 1, holding p2 and m fixed, plots the
optimal level of consumption of good 1 as p1 changes

Question 20

inter-temporal choices

Answer 20

how current decisions affect what options become available in the future

Question 21

consumption in two time periods

Answer 21

(c1, c2)

Question 22

amount of money in two time periods

Answer 22

(m1, m2)

Question 23

budget constraint with two periods

Answer 23

c2 = m2 + (m1 − c1)

Question 24

borrowing

Answer 24

lend money at interest rate r

Question 25

future value

Answer 25

c1 + (c2 / (1+r)) = m1 + (m2 /
(1+r))

Question 26

endowment

Answer 26

total amount of income

Question 27

horizontal intercept of budget constraint

Answer 27

the maximum amount of first-period consumption possible: c1 = m1 + (m2
/ (1+r))

Question 28

vertical intercept of budget constraint

Answer 28

he maximum amount of second-period
consumption possible: c2 = (1 + r)m1 + m2

Question 29

present value formula

Answer 29

pt = mt /
(1 + r)^t−1

Question 30

present value formula explained

Answer 30

allows to calculate the value of a given
amount of money T years in the future

Question 31

Net Present Value (NPV)

Answer 31

N P V = M1 − P1 +( (M2 − P2)
/(1 + r) )