Microeconomics I: Consumer Behaviour

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is the main concept behind the Cardinal utility approach?

Utility can be measured in specific units called utils. (correct)

Utility is subjective and cannot be measured.

Utility is always diminishing.

Utility depends solely on consumer preferences.

Which of the following describes the law of diminishing marginal utility?

Each additional unit of a good consumed provides less additional satisfaction. (correct)

Utility remains constant regardless of consumption level.

Total utility decreases as consumption increases.

The more of a good consumed, the greater the total utility.

What is a key assumption of the Ordinal utility approach?

Marginal utility is always increasing.

Utility can be measured in utils.

Total utility is the only consideration for consumer choices.

Consumers can rank their preferences without assigning specific values. (correct)

Which curve is derived from the concept of total utility?

Marginal utility curve Signup and view all the answers

In what way does consumer equilibrium relate to marginal utility?

It happens when marginal utility equals marginal cost. Signup and view all the answers

What characterizes impossible indifference curves?

They represent preferences that cannot coexist. Signup and view all the answers

Which concept indicates that consumers seek to maximize satisfaction?

Utility maximization Signup and view all the answers

Which of the following best describes the relationship between total utility and marginal utility?

Marginal utility is the derivative of total utility. Signup and view all the answers

What does the law of diminishing marginal utility state?

The addition to total utility declines as more of a commodity is consumed. Signup and view all the answers

Under which condition does the law of diminishing marginal utility hold true?

Units of the commodities must be standard. Signup and view all the answers

What is marginal utility when 6 units of the commodity have been consumed?

0 Signup and view all the answers

Which of the following reflects a situation where total utility remains constant?

The consumption of 6 units where marginal utility is 0. Signup and view all the answers

What is consumer equilibrium based on?

Balancing price and utility derived from consumption. Signup and view all the answers

What happens to total utility when the marginal utility is negative?

Total utility begins to decrease. Signup and view all the answers

In the cardinal utility approach, how is the utility function represented?

U = f(X1, X2, ... Xn) Signup and view all the answers

What is the marginal utility after consuming 7 units of the commodity?

-2 Signup and view all the answers

Which term refers to the overall satisfaction a consumer derives from consuming goods?

Total Utility Signup and view all the answers

What distinguishes impossible indifference curves (ICs)?

They represent combinations that exceed budget constraints. Signup and view all the answers

How are total utility (TU) and marginal utility (MU) related as consumption increases?

MU decreases as TU increases. Signup and view all the answers

What is the implication of cardinalist and ordinalist approaches in consumer theory?

Cardinalists measure utility in numerical terms, while ordinalists focus on ranking preferences. Signup and view all the answers

What is the main characteristic of utility in the cardinal utility approach?

Utility is relative and depends on the consumer. Signup and view all the answers

What is total utility?

The overall satisfaction from all units of a commodity consumed. Signup and view all the answers

What is marginal utility a measure of?

The additional satisfaction from consuming one more unit of a good. Signup and view all the answers

What happens when marginal utility becomes zero?

Total utility reaches a maximum or saturation point. Signup and view all the answers

According to the cardinal utility approach, how is marginal utility derived?

By calculating the change in total utility divided by the change in quantity. Signup and view all the answers

What does it indicate when marginal utility decreases?

Total utility increases at a decreasing rate. Signup and view all the answers

What is the implication of marginal utility becoming negative?

Total utility begins to decline. Signup and view all the answers

Which statement accurately describes the relationship between total utility and marginal utility?

An increase in total utility indicates a decrease in marginal utility. Signup and view all the answers

What does the negative slope of an indifference curve (IC) represent?

Marginal rate of substitution Signup and view all the answers

How does the marginal rate of substitution behave along an indifference curve?

It decreases Signup and view all the answers

Why is the second order condition important for the utility curve?

It ensures the utility curve is convex Signup and view all the answers

Which statement best reflects the 'more is better' assumption?

More of both goods will always yield higher satisfaction Signup and view all the answers

What defines the point of equilibrium for a consumer according to Cardinal utility theory?

When marginal utility equals price Signup and view all the answers

In the context of indifference curves, what is the implication of transitivity?

If A is preferred over B and B over C, then A is preferred over C Signup and view all the answers

What is a primary criticism of Cardinal utility measurement?

It assumes utility can be measured quantitatively Signup and view all the answers

Given two goods X and Y, if point B has more of both goods compared to point A, what can be concluded?

B should be preferred over A Signup and view all the answers

Which assumption is NOT part of ordinal utility theory?

Utility can be quantified Signup and view all the answers

What contradiction arises with impossible indifference curves?

They suggest that more is not better Signup and view all the answers

What does an indifference curve represent?

Bundles of goods yielding the same satisfaction Signup and view all the answers

Which property of indifference curves reflects that the slope decreases?

Diminishing marginal utility Signup and view all the answers

Why is the shape of the indifference curve typically convex to the origin?

To represent decreasing marginal rates of substitution Signup and view all the answers

What does the axiom of transitivity state in ordinal utility theory?

If A is preferred to B, and B is preferred to C, then A is preferred to C Signup and view all the answers

What does the absence of empirical evidence for the law of diminishing marginal utility indicate?

Utility measures are incorrect Signup and view all the answers

In the context of demand theory, what is meant by the ceteris paribus assumption?

It holds all other variables constant while examining price and demand Signup and view all the answers

Study Notes

Course Information

Course title: Microeconomics I
Course code: ECON 311
Lecturer: Dr. Priscilla Twumasi Baffour
Department: Economics - UG
Twitter: @pristwumasi

Lecture 1: Consumer Behaviour

Topics covered: Cardinal and Ordinal Utility Theories of Demand
Cardinal Utility Approach:
- Utility is measurable in units called utils
- Basic concepts include the consumer, utility, measurement of utility, total and marginal utility, and law of diminishing returns.
- The consumer is the decision-maker regarding commodities, acting rationally to maximize satisfaction.
- Utility is relative, not absolute, depending on the consumer.
- Utility is measurable as utils, quantitative like weight and volume
- Higher value = higher satisfaction.
- Total utility is the total benefit from all units consumed, increasing with consumption, but not always.
- Marginal utility is the additional utility from an extra unit consumed (slope of total utility curve).
- Demonstrates the law of diminishing marginal utility (MU).
- Formula for Marginal Utility: Change in total utility / Change in quantity
- Relationship between total and marginal utility (MU decreases, TU increases at a decreasing rate, or MU decreases below zero, TU declines)
Ordinal Utility Approach To Demand Theory:
- Assumptions:
  - Consumer ranks preferences based on satisfaction.
  - More is preferred to less.
  - Complete preference – consumer can compare any two bundles of goods and say whether they prefer one to the other or are indifferent.
  - Transitive preference – consumer's choices are consistent – if they prefer bundle A to bundle B and bundle B to bundle C, they must also prefer A to C.
- Indifference Curves:
  - IC represents combinations of goods that provide the same level of satisfaction.
  - Indifference maps are a collection of indifference curves that show different levels of satisfaction, ranking consumer preference.
Second order condition: The slope of IC determines if the utility curve is concave (substitutability).
- Impossible indifference curves: These curves violate the basic assumptions of rational consumer behavior.
Curvature of indifference curves:
- Indifference curves are generally convex to the origin (diminishing marginal rate of substitution)
- Special cases: Perfect substitutes (straight, parallel lines) and perfect complements (non-smooth, L-shaped).
Equilibrium of the Consumer:
- Achieved when MU = P
- If MU < P, consume less (MU increases)
- If MU > P, consume more (MU decreases)
Derivation of Demand:
- Using Diminishing Marginal Utility (DMU) principle.
- Relation to consumer equilibrium and marginal utility.
Marshall's Derivation of Demand: Equilibrium at MU = Price
Criticisms of Cardinal Utility:
- Measurable utility is unrealistic due to subjectivity.
- Constant utility of money is questionable (value fluctuates).
- Ceteris paribus assumption in demand curves (ignores income/substitution effects).
- Lack of empirical evidence for diminishing marginal utility.
Reading List:
- Chapter 4 of Jeffery M. Perloff's Microeconomics (2012, 6th edition)
- Chapter 3 of Hal R. Varian's Intermediate Microeconomics (2011)

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

Explore the foundational concepts of consumer behavior in the first lecture of Microeconomics I. This quiz covers Cardinal and Ordinal Utility Theories of Demand, focusing on utility measurement, satisfaction maximization, and the law of diminishing returns. Test your understanding of how consumers make decisions based on utility.