Week 3 Flashcards
How does the rationality model apply to consumer behavior?
The rationality model assumes that consumers make choices that maximize their utility or satisfaction. This means that consumers will choose the combination of goods and services that give them the most value for their money.
What are the income and substitution effects?
The income effect is the change in the quantity of a good or service consumed due to a change in the consumer’s income. The substitution effect is the change in the quantity of a good or service consumed due to a change in its relative price.
How do we measure the consumer’s welfare?
The consumer’s welfare can be measured by calculating the total utility they receive from consuming a given quantity of goods and services. This can be done by summing up the marginal utilities of each good or service consumed.
How does the rationality model apply to firm behavior?
The rationality model assumes that firms will make decisions that maximize their profits. This means that firms will choose the combination of inputs and outputs that will produce the most revenue for the least cost.
What is a monopoly?
A monopoly is a market structure in which there is only one firm that produces a good or service. This means that the firm has complete control over the supply of the good or service and can set the price without competition.
How does the rationality model apply to monopoly firms?
The rationality model assumes that monopoly firms will make decisions that maximize their profits. This means that monopoly firms will set their prices at the level that will maximize their revenues, given the demand for their goods or services.
What is a competitive firm?
A competitive firm is a firm that operates in a competitive market, where there are many firms producing the same good or service. In a competitive market, firms have little control over the price of the goods or services they produce and must compete with each other to attract customers.
How does the rationality model apply to competitive firms?
The rationality model assumes that competitive firms will make decisions that maximize their profits. This means that competitive firms will produce the quantity of goods or services that will maximize their revenues, given the market price and their costs of production.
How do income and substitution effects impact the behavior of firms in a competitive market?
The income and substitution effects can impact the behavior of firms in a competitive market by influencing the demand for their goods or services. An increase in income will generally increase the demand for goods and services, while a decrease in the relative price of a good or service will increase its demand.
