Utility Theory and Preferences Quiz

A numerical index representing the preference for different bundles of goods. Higher utility indicates a better bundle.

A statement that a bundle A is strictly preferred to another bundle B, meaning A provides higher utility.

A function that assigns a specific utility level to every possible combination of goods.

A type of utility that only captures the order of preference for different bundles, without indicating the intensity of preference.

A type of utility that treats the level of utility as a meaningful quantity, potentially indicating the strength of preference.

A curve that represents all combinations of goods that provide the same level of utility for a consumer.

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

The value of an extra unit of a good, expressed in terms of another good. For example, the MRS of water for food tells you how much food you'd be willing to give up for one extra unit of water.

The assumption that the Marginal Rate of Substitution decreases as a consumer consumes more of a good. This means that the more you have of one good, the less you're willing to give up of another to get one more unit.

The concept that consumers tend to prefer a variety of goods. This means that their indifference curves are typically convex, reflecting a decreasing MRS.

When the consumer gets more of one good and less of another, the value of the good they get more of decreases relative to the other good.

The slope of an indifference curve, which represents the MRS. It shows the amount of one good that must be given up to obtain one more unit of another good, while keeping utility constant.

The idea that for every combination of goods, there is an indifference curve that passes through it, representing all combinations of those goods that give the same utility.

The rate at which the utility from consuming a good changes as the quantity consumed increases.

States that expenditures are limited by income. It shows the combinations of goods a consumer can afford with a given income and prices.

The point where the budget constraint is tangent to an indifference curve, representing the highest possible utility the consumer can achieve given their budget.

The assumption that the additional utility gained from consuming one more unit of a good decreases as the quantity consumed increases.

The ability of a consumer to make consistent and rational choices, ensuring that preferences are transitive (if A is better than B, and B is better than C, then A is better than C).

The effect on quantity demanded due to a change in purchasing power caused by a price change.

The effect on quantity demanded due to a change in the relative price of goods, making one good relatively cheaper.

Goods that are consumed together, where a price increase in one leads to a decrease in demand for the other.

Goods that are used in place of each other, where a price increase in one leads to an increase in demand for the other.

Things that influence a consumer's preferences, tastes, or habits, potentially affecting their demand for a good.

All available income is spent on goods, meaning no money is left unused. This is a common assumption in models with no future period.

The point on the budget line where a consumer achieves the highest utility.

At the optimal choice, the slope of the indifference curve is equal to the slope of the budget line, meaning the rate at which a consumer is willing to trade one good for another (MRS) equals the market price ratio.

The price ratio is the relative price of two goods, representing the amount of one good you can exchange for another in the market.

The change in quantity demanded of a good in response to a change in its price, holding all other factors constant.

A scenario where quantity demanded increases when the price of a good falls.

A rare case where quantity demanded increases as the price rises (the opposite of the law of demand). This could occur under specific circumstances, like unusual preferences or changing budgets.

The change in quantity demanded caused by a change in income, holding all other factors constant.

A graphical representation showing the relationship between the quantity demanded of a good and a consumer's income, keeping prices constant.

The combination of both income and substitution effects when the price changes.

When a price decrease leads to a consumer feeling 'richer' and potentially increasing their demand for a good.

The part of the combined effect caused by the change in relative prices due to the price change, holding real income constant.

The change in demand caused by both the income effect and substitution effect when the price changes.