24 Questions
What is the assumption of indifference curve analysis that states that a consumer prefers more of a good to less?
More is better
What is the term for the rate at which a consumer is willing to substitute one good for another good and still maintain the same level of satisfaction?
Marginal rate of substitution
What is the graphical representation of a consumer's preferences, showing the different combinations of two goods that provide the same level of satisfaction?
Indifference curve
What is the term for the set of bundles of goods that a consumer can afford to purchase, given their income and the prices of goods?
Budget set
What is the term for the change in consumption pattern of a good in response to a change in its price, ceteris paribus?
Substitution effect
What is the term for the change in consumption pattern of a good in response to a change in real income, ceteris paribus?
Income effect
What is the term for goods that are consumed together, such as peanut butter and jelly?
Complementary goods
What is the term for goods that can be used in place of each other, such as butter and margarine?
Substitute goods
What happens to the consumer's opportunity set when there is a change in market prices and income?
The consumer's opportunity set changes.
If the price of good X decreases, what happens to the budget line?
The budget line shifts outward.
What is the equilibrium consumption bundle?
The affordable bundle that yields the greatest satisfaction to the consumer.
What happens to the consumption of good Y when the price of good X falls, assuming they are substitute goods?
The consumption of good Y decreases.
What happens to the consumption of good Y when the price of good X falls, assuming they are complementary goods?
The consumption of good Y increases.
What is the difference between the income effect and the substitution effect?
The income effect is a change in consumption due to a change in income, while the substitution effect is a change in consumption due to a change in relative prices.
How does an increase in income affect the consumer's budget line?
The budget line shifts outward.
What is the relationship between the price elasticity of demand and the slope of the indifference curve?
A higher price elasticity of demand is associated with a flatter indifference curve.
What happens to a consumer's budget constraint when their income increases?
The budget constraint expands.
How does an increase in income affect the consumption of normal goods?
It increases the consumption of normal goods.
What is the substitution effect of a price change?
The movement along a given indifference curve that results from a change in the relative prices of goods, holding real income constant.
What is the income effect of a price change?
The movement from one indifference curve to another that results from the change in real income caused by a price change.
How does an increase in the price of a good affect the consumption of that good, assuming it is an inferior good?
It decreases the consumption of the good.
What is the equation for the worker's opportunity set in a given 24-hour day, if the worker is offered a wage of $5 per hour, plus a fixed payment of $40?
The equation is $5h + $40, where $h is the number of hours worked.
How do cash gifts, in-kind gifts, and gift cards affect consumer behavior, according to indifference curve analysis?
They affect consumer behavior by altering the opportunity set and the indifference curve, leading to changes in consumption.
What is an example of a 'buy one, get one free' offer, and how does it affect consumer behavior, according to indifference curve analysis?
A 'buy one, get one free' offer is an example of a price change, which can lead to an increase in consumption of the good, as the consumer's opportunity set and indifference curve are affected.
Study Notes
Income Changes and Consumer Behavior
- An increase in income increases the consumption of normal goods.
- An increase in income decreases the consumption of inferior goods.
Substitution and Income Effects
- Substitution effect: The movement along a given indifference curve that results from a change in the relative prices of goods, holding real income constant.
- Income effect: The movement from one indifference curve to another that results from the change in real income caused by a price change.
Application of Indifference Curve Analysis
- Buy one, get one free: An application of indifference curve analysis.
- Cash Gifts, In-Kind Gifts, and Gift Cards: An application of indifference curve analysis.
- Choices by workers, and managers: An application of indifference curve analysis.
Demonstrate Problem
- The worker's opportunity set in a given 24-hour day is dependent on the wage and fixed payment.
Constraints
- Changes in income: The consumer's opportunity set depends on market prices and the consumer's income.
- Changes in prices: A change in price of a good affects the consumer's opportunities.
Consumer Equilibrium
- The equilibrium consumption bundle is the affordable bundle that yields the greatest satisfaction to the consumer.
Comparative Statistics
- Price changes and consumer behavior: A change in the price of a good will lead to a change in the equilibrium consumption bundle.
- Income changes and consumer behavior: A change in income will lead to a change in the consumption patterns of consumers.
The Theory of Individual Behavior
- Consumer behavior: A consumer is an individual who purchases goods and services for consumption.
- Consumer opportunities: Represent the possible goods and services consumers can afford to consume.
- Consumer preferences: Determine which goods will be consumed.
The Assumption of Indifference Curve
- Completeness: A consumer's preferences are complete.
- More is better: A consumer prefers more of a good to less.
- Diminishing marginal rate of substitution: The rate at which a consumer is willing to substitute one good for another decreases as the consumer consumes more of the good.
- Transitivity: A consumer's preferences are transitive.
Indifference Curve
- A curve that defines the combinations of two goods that give a consumer the same level of satisfaction.
Marginal Rate of Substitution
- The rate at which a consumer is willing to substitute one good for another and still maintain the same level of satisfaction.
A Family of Indifference Curves
- Curves are convex.
- Curves don't cross.
- Curves farther from the origin imply higher levels of satisfaction than curves closer to the origin.
Constraints
- The budget constraints:
- Budget set: The bundles of goods a consumer can afford.
- Budget line: The bundles of goods that exhaust a consumer's income.
This quiz explores how changes in income affect consumer behavior and optimal consumption choices, including the impact on normal and inferior goods.
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