Podcast
Questions and Answers
Which scenario violates the assumption of transitivity in consumer preferences?
Which scenario violates the assumption of transitivity in consumer preferences?
- A consumer consistently chooses the cheaper of two identical products.
- A consumer always buys the same brand of coffee, despite occasional price fluctuations.
- A consumer is indifferent between two goods, indicating no strict preference.
- A consumer prefers apples to bananas and bananas to cherries, but then prefers cherries to apples. (correct)
A consumer's budget constraint shifts inward. What is the most likely cause?
A consumer's budget constraint shifts inward. What is the most likely cause?
- A decrease in the prices of all goods.
- An increase in the consumer's preferences for luxury goods.
- An increase in the consumer's income.
- A decrease in the consumer's income. (correct)
What does the 'Buyer’s Equilibrium Condition' ($MB_s/P_s = MB_j/P_j$) signify in consumer choice theory?
What does the 'Buyer’s Equilibrium Condition' ($MB_s/P_s = MB_j/P_j$) signify in consumer choice theory?
- The point where the additional satisfaction per dollar spent is equal across all goods. (correct)
- The point where a consumer saves the maximum amount of their budget.
- The condition where the total marginal benefit from all goods equals the total expenditure.
- The state where a consumer only purchases goods with the lowest prices.
Under what condition might a consumer optimally choose to spend their entire budget on only one good, even if they initially consumed a variety of goods?
Under what condition might a consumer optimally choose to spend their entire budget on only one good, even if they initially consumed a variety of goods?
A consumer's marginal benefit for a good decreases as they consume more of it. What economic principle does this illustrate?
A consumer's marginal benefit for a good decreases as they consume more of it. What economic principle does this illustrate?
A consumer initially divides their budget between Goods A and B. If the price of Good A increases, what will happen to the consumer's budget set?
A consumer initially divides their budget between Goods A and B. If the price of Good A increases, what will happen to the consumer's budget set?
Suppose a consumer's preferences change such that they now value good X much more than good Y. Assuming prices and income remain constant, what is the likely outcome?
Suppose a consumer's preferences change such that they now value good X much more than good Y. Assuming prices and income remain constant, what is the likely outcome?
Why do economists typically assume that consumers are 'price-takers'?
Why do economists typically assume that consumers are 'price-takers'?
Flashcards
Taste and Preferences
Taste and Preferences
An individual's likes and dislikes, influencing purchasing decisions.
Prices (monetary cost)
Prices (monetary cost)
The monetary cost of goods/services, acting as incentives or disincentives.
Budget Constraint
Budget Constraint
The limit on what a consumer can afford, based on income and resources.
Diminishing Marginal Benefit
Diminishing Marginal Benefit
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Budget Set
Budget Set
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Budget Constraint
Budget Constraint
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Buyer's Equilibrium Condition
Buyer's Equilibrium Condition
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Marginal Benefit per Dollar
Marginal Benefit per Dollar
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Study Notes
- Understanding consumer decisions involves analyzing preferences, costs, and resources.
Consumer Preferences
- Preferences are shaped by what consumers like.
- More of a good thing is generally preferred.
- Purchasing decisions reveal consumer tastes.
- Assumptions about preferences include non-satiation, completeness, and transitivity.
- Non-satiation: More goods are always better.
- Completeness: Consumers can express a preference between any two choices.
- Transitivity: Preferences are internally consistent (if A > B and B > C, then A > C).
Costs
- Prices act as incentives in purchase decisions.
- Prices define the relative cost of goods.
- Buyers are assumed to be price-takers, with constant and given prices.
Resources
- The budget set includes all affordable bundles of goods and services.
- The budget constraint represents the limit of goods/activities a consumer can choose while exhausting their budget.
- Assumptions include no saving or borrowing and a continuous budget constraint despite working with whole units of goods/services.
Putting it all together
- As the quantity of a good increases, the marginal benefit decreases due to consumer exhaustion.
- Buyer's Equilibrium Condition: MBs/Ps = MBj/Pj, meaning "equal bang for your buck".
- If marginal benefits aren't equal, consumers can improve satisfaction by shifting consumption to goods with higher marginal benefits per dollar spent.
- With multiple goods: MBs/Ps = MBj/Pj = MBk/Pk.
- If exact units aren't attainable, consumers choose the closest integer options within budget.
- Spending the entire budget on one good may be optimal in some cases, where marginal benefit per € doesn't have to be equal.
- Points to the right of the budget constraint are unaffordable.
- The slope of the constraint is negative, representing the trade-off between goods, derived from Pgood1/Pgood2.
- Changes in the price of one good alter the quantity demanded and the slope of the budget constraint.
Demand Curve
- If the price decreases, the quantity demanded increases.
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Description
Explore consumer decisions through preferences, costs, and resources. Understand how preferences are shaped and the assumptions behind them, like non-satiation and transitivity. Learn how prices act as incentives and how budget constraints limit consumer choices.
