Consumer Choice Theory Quiz

A concept in economics where choices are internally consistent, not necessarily 'right' choices.

Consumers can always compare any two choices and state a preference (including indifference).

If a consumer prefers A to B, and B to C, then they must prefer A to C.

Represents that a consumer strictly prefers choice A over choice B.

Represents that a consumer is indifferent between choices A and B.

Represents that a consumer weakly prefers A over B (either prefers A or is indifferent).

The axioms are Completeness and Transitivity. They describe how a rational consumer makes choices in a consistent way.

It means their choices are internally consistent, based on their preferences, and follow the axioms of completeness and transitivity.

If a consumer prefers choice A to choice B, then they should also prefer a choice very similar to A to choice B.

It implies that preferences do not change abruptly, but rather smoothly with small changes in the choices.

A mathematical function that assigns a numerical value to each choice, reflecting how much happiness or 'utility' it brings to the consumer.

A higher utility value indicates that the consumer prefers that choice more.

The theorem states that if the axioms of choice hold (Completeness, Transitivity, and Continuity), then a utility function can always be created to represent a consumer's preferences.

No, a consumer's preferences can be represented by many different utility functions. But all these functions must preserve the same ordering of choices.

The utility function only tells us the order of preferences (which choice is preferred more), but not the magnitude of the preference.

A utility function that gives numbers representing the magnitude of preferences.

A function applied to a utility function that preserves the original preference ordering. It transforms utility values while maintaining the relative ranking of choices.

It tells us the relative preference of a consumer for one bundle of goods over another. A higher utility value means the consumer prefers that bundle more.

No, we can't directly compare utility values across different individuals. Utility is subjective and varies with individual preferences.

They allow us to simplify a utility function without changing the underlying preference order. This is helpful for calculations and understanding the preferences.

It means that even though they assign different numerical values to each choice, they yield the same relative ranking of those choices. A consumer would still make the same decisions.

By checking if there exists a monotonically increasing function that connects the original and transformed utility functions. If there is, the ordering is preserved.

It may change the preference ordering, leading to different choices being preferred. The transformed utility function will not accurately reflect the original preferences.

A curve showing combinations of two goods that provide a consumer with the same level of utility. All points on the curve offer the same satisfaction.

Ū represents a specific level of utility. It's a constant value used to create an indifference curve.

The slope of an indifference curve represents the marginal rate of substitution (MRS), which tells us how much of one good a consumer is willing to give up to get one more unit of another good, while maintaining the same utility level. It's negative because you have to give up something to get more.

We find indifference curves by setting the utility function equal to a specific utility level (Ū) and then solving for one of the goods as a function of the other and Ū.

The MRS shows how much of one good a consumer is willing to give up to get one more unit of another good, while keeping their overall satisfaction (utility) constant.

The MRS is calculated as the ratio of the marginal utility of good x (∂U/∂x) to the marginal utility of good y (∂U/∂y).

A constant MRS implies that the consumer always values one good a fixed amount more than the other, regardless of how much of each good they have.

A changing MRS indicates that the consumer's preference for one good changes depending on how much they already possess of each good.

The slope of an indifference curve at any point represents the MRS at that point – the rate at which a consumer is willing to trade one good for another.

Indifference curves depict the consumer's preferences and are used to analyze their choices under different budget constraints.

The shape of an indifference curve reflects the MRS. A linear indifference curve indicates a constant MRS, while a curved one implies a changing MRS.

The rate at which a consumer is willing to trade one good for another while maintaining the same level of utility. It is represented by the slope of the indifference curve.

A property of indifference curves where they are bowed inward towards the origin. This means the MRS decreases as the consumer consumes more of one good.

Because as a consumer has more of one good, the additional satisfaction (marginal utility) from getting more of that good decreases. They value getting more of the other good relatively more.

A higher utility value represents a greater level of satisfaction for the consumer.

The MRS is equal to the negative slope of the indifference curve at any given point. This means that as the slope becomes steeper, the consumer is willing to give up more of one good to get more of the other.

Utility increases as you move up and to the right on the curve because you are consuming more of both goods.

Utility decreases as you move down and to the left on the curve because you are consuming less of both goods.

In economics, rationality means a person's choices are internally consistent, even if not always 'right'. Their preferences are predictable and follow certain rules.

As you have more of one good, the additional satisfaction (marginal utility) from getting more of that good decreases. You value getting more of the other good relatively more.

A mathematical function that assigns a number to each choice, reflecting how much satisfaction or 'utility' it brings to the consumer.

Lines on a graph showing combinations of two goods that give the consumer the same level of utility.

Utility functions help us to move from abstract preferences to a mathematical model of consumer choice. This allows us to use mathematical tools to understand consumer behavior.

The MRS tells us how much of one good a consumer needs to receive to compensate for losing one unit of another good, while maintaining the same level of satisfaction.

The consumer always values one good a fixed amount more than the other, regardless of how much of each good they have.

The consumer's preference for one good changes depending on how much they already possess of each good.

An indifference curve that is bowed inward towards the origin. This means the MRS decreases as the consumer consumes more of one good.

The MRS decreases as the consumer consumes more of one good. This means the consumer is willing to give up less of the other good for an additional unit of the first good.

A specific level of utility (satisfaction) represented by a number. It's used to create an indifference curve by setting the utility function equal to this value.

The ranking of choices based on their utility, from most preferred to least preferred.

Using a monotonically increasing transformation, we can change the numerical values of the utility function without changing the underlying order of preference. This is useful for simplifying calculations.

A function that always gets bigger as the input gets bigger. For example, f(x) = x + 10, f(x) = ln(x), or f(x) = x^(1/2) are all monotonically increasing.

It allows us to simplify a utility function without changing its underlying preference order, making calculations easier.

The relative ranking of choices remains the same even though the numerical values associated with each choice may have changed.

The MRS is equal to the negative slope of the indifference curve at any given point. This means that as the slope becomes steeper, the consumer is willing to give up more of one good to get more of the other.