WEEK 4 Flashcards
What is marginal utility
The additional utility generated by a good
What is diminishing marginal utility
The additional utility reduces the more you get, eg the 8th pizza slice is worse than the 1st
What is the marginal rate of substitution
How much of one good will a customer give up to get a little more of another
What is the marginal rate of substitution equation
marginal utility of item 1 / marginal utility of item 2
What does the marginal rate of substitution mean if A’s marginal utility is 4 and B’s is 3
4/3 cokes = 1 pizza
The MRS is what of the indifference curve
The absolute slope
How is the MRS shown on the curve
By a straight line coming of the co ord of the bundle
MRS is usually what
Diminishing
If the gradient of the line is steeper for MRS then
MRS is larger
What is a budget constraint
Individuals have money income on a budget to finance consumption
What do we denote money as
m
How to work out budget constraints
Given the co ord then times them by the price and add - if m is greater than or equal to then it is feasible
What is the budget set
Consists of all bundles satisfying the budget constraint
What is the budget line
Consists of all the bundles that exhaust the consumer income
Whats the difference in workings out for budget lines and sets
Lines is =
Sets is greater than or equal to
In a graph what is the budget line and what is the budget set
Budget line is the line
Set is the area under the line
If a co ord is above the line then
Not in the budget constraint
What is a constrained optimization bundle
The feasible bundle that optimizes utility
How do we find the optimal choice
When the slope of the indifference curve is at the same place as the budget line
What is the rational spending rule
maximum utility is found when MRS = p1/p2
If MRS>p1/p2
buy more of good one
If MRS<p1/p2
Buy more of good 2
What is budget variation
If goods A and B are normal goods, an increase in income leads to consumption
As long as the consumer derives utility from both goods then
A price increase will lower her utility
Substitution effect is always what
negative
Income effects are positive and negative for what types of good
Inferior good
Normal good
what is a giffen good
The income effect of an inferior good swamp the substitution effect
What is the income elasticity of demand
The %change in quantity demanded associated with a 1% change in consumer income
What does income elasticity of demand describe
describes how responsive demand is to income changes
