Microeconomics I: Consumer Behaviour
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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?

<p>Marginal utility curve (D)</p> Signup and view all the answers

In what way does consumer equilibrium relate to marginal utility?

<p>It happens when marginal utility equals marginal cost. (C)</p> Signup and view all the answers

What characterizes impossible indifference curves?

<p>They represent preferences that cannot coexist. (D)</p> Signup and view all the answers

Which concept indicates that consumers seek to maximize satisfaction?

<p>Utility maximization (B)</p> Signup and view all the answers

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

<p>Marginal utility is the derivative of total utility. (C)</p> Signup and view all the answers

What does the law of diminishing marginal utility state?

<p>The addition to total utility declines as more of a commodity is consumed. (C)</p> Signup and view all the answers

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

<p>Units of the commodities must be standard. (C)</p> Signup and view all the answers

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

<p>0 (D)</p> Signup and view all the answers

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

<p>The consumption of 6 units where marginal utility is 0. (D)</p> Signup and view all the answers

What is consumer equilibrium based on?

<p>Balancing price and utility derived from consumption. (D)</p> Signup and view all the answers

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

<p>Total utility begins to decrease. (C)</p> Signup and view all the answers

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

<p>U = f(X1, X2, ... Xn) (D)</p> Signup and view all the answers

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

<p>-2 (A)</p> Signup and view all the answers

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

<p>Total Utility (D)</p> Signup and view all the answers

What distinguishes impossible indifference curves (ICs)?

<p>They represent combinations that exceed budget constraints. (A)</p> Signup and view all the answers

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

<p>MU decreases as TU increases. (C)</p> Signup and view all the answers

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

<p>Cardinalists measure utility in numerical terms, while ordinalists focus on ranking preferences. (B)</p> Signup and view all the answers

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

<p>Utility is relative and depends on the consumer. (C)</p> Signup and view all the answers

What is total utility?

<p>The overall satisfaction from all units of a commodity consumed. (A)</p> Signup and view all the answers

What is marginal utility a measure of?

<p>The additional satisfaction from consuming one more unit of a good. (B)</p> Signup and view all the answers

What happens when marginal utility becomes zero?

<p>Total utility reaches a maximum or saturation point. (D)</p> Signup and view all the answers

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

<p>By calculating the change in total utility divided by the change in quantity. (B)</p> Signup and view all the answers

What does it indicate when marginal utility decreases?

<p>Total utility increases at a decreasing rate. (A)</p> Signup and view all the answers

What is the implication of marginal utility becoming negative?

<p>Total utility begins to decline. (B)</p> Signup and view all the answers

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

<p>An increase in total utility indicates a decrease in marginal utility. (A)</p> Signup and view all the answers

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

<p>Marginal rate of substitution (B)</p> Signup and view all the answers

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

<p>It decreases (B)</p> Signup and view all the answers

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

<p>It ensures the utility curve is convex (D)</p> Signup and view all the answers

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

<p>More of both goods will always yield higher satisfaction (C)</p> Signup and view all the answers

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

<p>When marginal utility equals price (C)</p> Signup and view all the answers

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

<p>If A is preferred over B and B over C, then A is preferred over C (C)</p> Signup and view all the answers

What is a primary criticism of Cardinal utility measurement?

<p>It assumes utility can be measured quantitatively (A)</p> 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?

<p>B should be preferred over A (B)</p> Signup and view all the answers

Which assumption is NOT part of ordinal utility theory?

<p>Utility can be quantified (A)</p> Signup and view all the answers

What contradiction arises with impossible indifference curves?

<p>They suggest that more is not better (C)</p> Signup and view all the answers

What does an indifference curve represent?

<p>Bundles of goods yielding the same satisfaction (A)</p> Signup and view all the answers

Which property of indifference curves reflects that the slope decreases?

<p>Diminishing marginal utility (C)</p> Signup and view all the answers

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

<p>To represent decreasing marginal rates of substitution (C)</p> Signup and view all the answers

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

<p>If A is preferred to B, and B is preferred to C, then A is preferred to C (B)</p> Signup and view all the answers

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

<p>Utility measures are incorrect (A)</p> Signup and view all the answers

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

<p>It holds all other variables constant while examining price and demand (A)</p> Signup and view all the answers

Flashcards

Utility

In economics, utility is the satisfaction a consumer gets from consuming a product or service.

Total Utility

The total satisfaction a consumer gets from consuming a certain quantity of a good or service.

Marginal Utility

The additional satisfaction a consumer gets from consuming one more unit of a good or service.

Law of Diminishing Marginal Utility

The principle that as a consumer consumes more of a good, the additional satisfaction they get from each extra unit decreases.

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Consumer Equilibrium

When a consumer is getting the maximum satisfaction possible from their budget, considering the prices of the goods.

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Total Utility Curve

A graph that shows the relationship between the quantity of a good consumed and the total utility received.

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Marginal Utility Curve

A graph that shows the relationship between the quantity of a good consumed and the marginal utility received.

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Marshallian Demand Curve

A curve that shows the relationship between the price of a good and the quantity demanded, based on the idea that as the price of a good decreases, the quantity demanded increases.

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Utility Function

A mathematical function that represents the total utility a consumer receives from consuming different combinations of goods.

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Standard Units

The units of the good being consumed must be consistent (e.g., a cup of coffee, a pair of shoes).

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Stable Preferences

The consumer's preferences should remain stable during the consumption period.

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Normal Mental State

The consumer must be in a normal mental state (not intoxicated or mentally unstable).

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Saturation Point

When marginal utility is zero, it means you're at the point where consuming another unit of the good won't add any more satisfaction.

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Negative Marginal Utility

A point where consuming more of a good would actually make you less happy. Think of overeating pizza.

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Relationship between Total Utility & Marginal Utility

The relationship between total utility and marginal utility is like a graph. Total utility increases at a decreasing rate when marginal utility is decreasing, reaches a maximum when marginal utility is zero, and decreases when marginal utility is negative.

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Demand Curve

The curve that shows the relationship between the price of a good and the quantity demanded by a consumer.

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Ordinal Utility

A preference ranking system where consumers compare bundles of goods based on their relative satisfaction without assigning numerical values to utility.

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Indifference Curve

A curve that shows all possible combinations of two goods that provide the same level of satisfaction for a consumer.

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Indifference Map

A collection of indifference curves, representing a consumer's complete preference ranking across different combinations of goods.

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Convex Indifference Curve

The shape of an indifference curve, where as a consumer moves along it, they give up less and less of one good for an extra unit of the other.

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Perfect Complements

A type of indifference curve where the consumer prefers consuming goods in fixed proportions. The consumer gets no additional satisfaction from consuming more of one good without a corresponding increase in the other.

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Marginal Utility (MU)

The additional satisfaction gained from consuming one more unit of a good or service.

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Impossible Indifference Curves

Indifference curves that are impossible to represent in the real world due to violating fundamental economic principles, such as decreasing marginal rate of substitution or non-satiation.

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Marginal Rate of Substitution (MRS)

The rate at which a consumer is willing to trade one good for another while maintaining the same level of satisfaction.

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Diminishing Marginal Rate of Substitution

The slope of an indifference curve represents the MRS. As you move down the curve, the slope decreases, indicating that the consumer is willing to give up less of one good for an additional unit of the other.

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Why is an Indifference Curve Convex?

An indifference curve is convex to the origin because of the diminishing marginal rate of substitution. This means that consumers are willing to trade less of one good for an additional unit of the other as they move down the curve.

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Second Order Condition

The condition that ensures the indifference curve is convex, meaning that the marginal utility of a good decreases as you consume more of it.

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Why is an Indifference Curve Impossible?

An impossible indifference curve exists because it violates the 'more is better' assumption. If you're indifferent between two bundles, and one has more of everything, then you should actually prefer the bundle with more.

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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)

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Econ 311 Microeconomics I Lecture 1 PDF

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.

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