WEEK 4

Question 1

What is marginal utility

Answer 1

The additional utility generated by a good

Question 2

What is diminishing marginal utility

Answer 2

The additional utility reduces the more you get, eg the 8th pizza slice is worse than the 1st

Question 3

What is the marginal rate of substitution

Answer 3

How much of one good will a customer give up to get a little more of another

Question 4

What is the marginal rate of substitution equation

Answer 4

marginal utility of item 1 / marginal utility of item 2

Question 5

What does the marginal rate of substitution mean if A’s marginal utility is 4 and B’s is 3

Answer 5

4/3 cokes = 1 pizza

Question 6

The MRS is what of the indifference curve

Answer 6

The absolute slope

Question 7

How is the MRS shown on the curve

Answer 7

By a straight line coming of the co ord of the bundle

Question 8

MRS is usually what

Answer 8

Diminishing

Question 9

If the gradient of the line is steeper for MRS then

Answer 9

MRS is larger

Question 10

What is a budget constraint

Answer 10

Individuals have money income on a budget to finance consumption

Question 11

What do we denote money as

Answer 11

m

Question 12

How to work out budget constraints

Answer 12

Given the co ord then times them by the price and add - if m is greater than or equal to then it is feasible

Question 13

What is the budget set

Answer 13

Consists of all bundles satisfying the budget constraint

Question 14

What is the budget line

Answer 14

Consists of all the bundles that exhaust the consumer income

Question 15

Whats the difference in workings out for budget lines and sets

Answer 15

Lines is =
Sets is greater than or equal to

Question 16

In a graph what is the budget line and what is the budget set

Answer 16

Budget line is the line
Set is the area under the line

Question 17

If a co ord is above the line then

Answer 17

Not in the budget constraint

Question 18

What is a constrained optimization bundle

Answer 18

The feasible bundle that optimizes utility

Question 19

How do we find the optimal choice

Answer 19

When the slope of the indifference curve is at the same place as the budget line

Question 20

What is the rational spending rule

Answer 20

maximum utility is found when MRS = p1/p2

Question 21

If MRS>p1/p2

Answer 21

buy more of good one

Question 22

If MRS<p1/p2

Answer 22

Buy more of good 2

Question 23

What is budget variation

Answer 23

If goods A and B are normal goods, an increase in income leads to consumption

Question 24

As long as the consumer derives utility from both goods then

Answer 24

A price increase will lower her utility

Question 25

Substitution effect is always what

Answer 25

negative

Question 26

Income effects are positive and negative for what types of good

Answer 26

Inferior good
Normal good

Question 27

what is a giffen good

Answer 27

The income effect of an inferior good swamp the substitution effect

Question 28

What is the income elasticity of demand

Answer 28

The %change in quantity demanded associated with a 1% change in consumer income

Question 29

What does income elasticity of demand describe

Answer 29

describes how responsive demand is to income changes