EC4101 Week 8 Lecture 1
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Questions and Answers

What is the concept that explains why each additional unit of a good adds less to utility than the previous unit?

  • Diminishing returns
  • Marginal utility
  • Utility maximization
  • Diminishing marginal utility (correct)

    • How can consumer preferences among consumption bundles be represented?

  • By market demand curves
  • By the budget constraint
  • Using supply curves
  • Through indifference curves (correct)

    • What does a downward sloping indifference curve indicate about consumer preferences?

  • Consumers are willing to trade off one good for another. (correct)
  • Consumers derive equal utility from both goods.
  • Consumers will not change their consumption bundle.
  • Consumers prefer one good over another entirely.

    • What is indicated by the Marginal Rate of Substitution on an indifference curve?

    <p>The consumer's willingness to trade one good for another</p> Signup and view all the answers

    What occurs to the budget constraint when there is a change in income?

    <p>It shifts outward, allowing for more consumption choices.</p> Signup and view all the answers

    Which characteristic defines perfect substitutes in terms of indifference curves?

    <p>They are straight lines.</p> Signup and view all the answers

    What effect does an increase in the price of one good have on the budget constraint?

    <p>It causes the curve to pivot inward around the unaffected good.</p> Signup and view all the answers

    What is defined as the disutility in consumer theory?

    <p>The negative marginal utility from consumption</p> Signup and view all the answers

    Which of the following best describes the characteristics of a budget constraint?

    <p>It illustrates the maximum combinations of goods that can be purchased given income and prices.</p> Signup and view all the answers

    How is marginal utility calculated?

    <p>By taking the change in total utility over the change in consumption</p> Signup and view all the answers

    Study Notes

    Consumer Theory Assumptions

    • People are rational; they always choose the best option.
    • All goods have utility (value/satisfaction from consumption).
    • Marginal utility is the change in utility from consuming one additional unit of a good.
    • There is no saving; consumers spend all income.
    • Marginal utility diminishes over time.
    • Diminishing marginal utility: Each additional unit provides less utility than the previous unit.

    Marginal Utility Calculation

    • To find marginal utility, divide total utility by the quantity of goods.
    • Negative marginal utility indicates disutility.

    Consumer Preferences

    • Consumer preferences are shown through indifference curves.
    • Indifference curves show consumption bundles that offer the same level of satisfaction.
    • Indifference curves are always downward sloping and convex to the origin (due to diminishing marginal utility).
    • Indifference curves never intersect.

    Budget Constraints

    • Budget constraints show the limit on consumption bundles a consumer can afford.
    • This often leads people to consume less than they desire.
    • The slope of the budget constraint line represents the relative price of two goods.
    • A change in income shifts the budget constraint curve.
    • A change in the price of one good causes the budget constraint curve to pivot.

    Utility Maximization

    • Consumers aim to maximize utility per euro spent.
    • Compare the marginal utility and the price of goods to adjust spending accordingly.
    • Optimal consumption occurs where the marginal utility per euro spent is equal for all goods, subject to budget constraints.

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    Consumer Theory PDF

    Description

    Explore the essential principles of consumer theory, including rational choices, marginal utility, and consumer preferences. This quiz will test your understanding of indifference curves and budget constraints, key elements in the field of economics. Perfect for students looking to grasp the foundations of consumer behavior!

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