Podcast
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?
- It becomes negative only after consuming the first unit.
- It remains constant regardless of the amount consumed.
- It generally increases with each additional unit.
- It diminishes with each additional unit consumed. (correct)
How are perfect substitutes represented in a consumer's preference model?
How are perfect substitutes represented in a consumer's preference model?
- By downward sloping curves that never intersect.
- By straight-line indifference curves with a fixed slope. (correct)
- By straight-line indifference curves with a variable slope.
- By right-angle indifference curves indicating fixed complements.
What does the budget constraint illustrate in consumer theory?
What does the budget constraint illustrate in consumer theory?
- The maximum utility a consumer can achieve regardless of income.
- The individual preferences for different goods without income restrictions.
- The total utility of all goods consumed at a fixed income level.
- The limit on the consumption bundles a consumer can afford. (correct)
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?
How is the marginal rate of substitution computed?
How is the marginal rate of substitution computed?
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?
Which statement best describes indifference curves?
Which statement best describes indifference curves?
What indicates disutility in consumer theory?
What indicates disutility in consumer theory?
Flashcards
Marginal Utility
Marginal Utility
The change in satisfaction from consuming one more unit of a good.
Diminishing Marginal Utility
Diminishing Marginal Utility
Each extra unit of a good brings less satisfaction than the previous one.
Indifference Curve
Indifference Curve
Shows consumption bundles giving the same satisfaction level.
Marginal Rate of Substitution
Marginal Rate of Substitution
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Perfect Substitutes
Perfect Substitutes
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Perfect Complements
Perfect Complements
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Budget Constraint
Budget Constraint
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Relative Price
Relative Price
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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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