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Questions and Answers
What happens to the marginal utility when additional units of a good are consumed?
What happens to the marginal utility when additional units of a good are consumed?
How are perfect substitutes represented in a consumer's preference model?
How are perfect substitutes represented in a consumer's preference model?
What does the budget constraint illustrate in consumer theory?
What does the budget constraint illustrate in consumer theory?
What is the effect of an increase in income on the budget constraint?
What is the effect of an increase in income on the budget constraint?
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How is the marginal rate of substitution computed?
How is the marginal rate of substitution computed?
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What effect does a change in the price of one good have on the budget constraint?
What effect does a change in the price of one good have on the budget constraint?
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Which statement best describes indifference curves?
Which statement best describes indifference curves?
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What indicates disutility in consumer theory?
What indicates disutility in consumer theory?
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Study Notes
Consumer Theory Assumptions
- People are rational, choosing the best options.
- All goods have utility (value/satisfaction from consumption).
- Marginal Utility: the change in utility from consuming an additional unit.
- Consumers spend all income (no savings).
- Marginal utility diminishes over time, each additional unit bringing less utility than the previous one.
Marginal Utility Calculation
- Calculate by dividing total utility by the quantity of goods.
- A negative result indicates disutility.
Consumer Preferences
- Shown through indifference curves.
- These curves represent bundles of goods providing equal satisfaction.
- Indifference curves slope downwards and never intersect.
- The shape is convex due to diminishing marginal utility.
Budget Constraints
- Represent the limits of affordable consumption bundles.
- Consumers aim to consume less than their desired level.
- The slope of the budget constraint shows the relative price of goods.
- A change in income shifts the constraint.
- A change in the relative price pivots the constraint.
Optimizing Consumption
- Consumers aim for the highest indifference curve possible while staying within their budget.
- This occurs at the point where the indifference curve is tangent to the budget constraint.
- At this point, the marginal rate of substitution equals the relative price.
Perfect Substitutes & Complements
- Perfect substitutes: straight-line indifference curves, fixed marginal rate of substitution
- Perfect complements: right-angled indifference curves.
Maximizing Utility per € spent
- Consumers look to maximize total utility for the amount of money spent.
- Comparing marginal utility per euro across different products will show the best product to spend on.
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Description
Explore the fundamental concepts of consumer theory, including assumptions about rational choices, utility, and marginal utility calculations. This quiz will help you understand consumer preferences through indifference curves and the impact of budget constraints on consumption decisions.
