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Flashcards in Topic 4 Deck (19)
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0
Q

How can you illustrate a consumer’s preference among consumption bundles?

A

Indifference curves

1
Q

What does the theory of consumer choice address?

A

Do all demand curves slope downwards?
How do wages affect labour supply?
How do interest rates affect household saving?

2
Q

What is an indifference curve?

A

It shows consumption bundles that give the consumer the same level of utility

3
Q

What is utility?

A

It is a measure of satisfaction

Represented by the utility function U=U(x,y)

4
Q

What are the two concepts of utility?

A

Cardinal and ordinal

5
Q

What is cardinal utility?

A

Believed it can be measured like a length using utils

6
Q

What is marginal utility?

A

The extra utility gained from additional amounts of the good.

For every extra unit we consume the extra utility becomes less and less

7
Q

Marginal utility of x may be defined as…

A

The change in total utility following an infinitely small change in the amount of x consumer

8
Q

Which of cardinal and marginal do economists prefer to use?

A

Ordinal utility

9
Q

What is ordinal utility?

A

Cannot assign a numerical value to utility but can order in terms of what you prefer
Implies you don’t know the magnitude of marginal utility

10
Q

What is the marginal rate of substitution?

A

The slope at any point on an indifference curve is the MRS

11
Q

What is the equation for the slope of an indifference curve?

A

-MUx/MUy

12
Q

What are the four properties of indifference curves?

A

1) higher are prefered to lower
2) indifference curves are downward sloping
3) indifference curves do not cross
4) usually bowed inwards (convex to the origin

13
Q

What are the two extreme cases where the indifference curves are not bowed inwards?

A

Perfect substitutes and complements

14
Q

What does an indifference curve for perfect substitutes look like?

A

Straight lines

Marginal rate of substation is a fixed number

15
Q

What does an indifference curve for perfect complements look like?

A

Two goods with right angle indifference curves

16
Q

Describe the budget constraint

A

It depicts the limit on the consumption bundles that a consumer can afford

17
Q

Describe the Income Effect

A

The change in consumption that results when a price change moves the consumer to a higher or lower indifference curve

18
Q

Describe the substitution effect

A

The change in consumption that results when a price change moves the consumer along an indifference curve to a poit with a different marginal rate of substitution