Busecon Module 3 Ii

Front 1

When a consumer is in _ there is no way to increase utility by relocating the budget.

Once the _ has been achieved, any shift in spending from one good to another will decrease utility.

In _, the last peso spent on each good yield the same utility. More specifically, utility is maximized when the budget is completely spent and the marginal utility of a good divided by its price is identical for the last unit of each good purchased

Back 1

equilibrium

Front 2

A more sophisticated method in explaining consumer behavior is by using

Back 2

budget line

indifference curve.

Front 3

An economic tool that reflects consumer tastes and preferences is the

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indifference curve.

Front 4

is an approach to the study of consumer behavior that requires no numerical measure of utility.

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Indifference Curve analysis

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is a curve that shows all combinations of goods that provide the consumer the same satisfaction, or the same utility.

Since each of the alternative bundles of goods yield the same level of utility, the consumer is indifferent about which combination is actually consumed

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indifference curve

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T/F

Combinations of goods along the indifference curve reflect some constant, though unspecified, level of total utility.

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TRUE

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A set of indifference curves exhibits three basic characteristics:

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Downward sloping

Nonintersecting

Convex to the origin

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Convex to the origin

An indifference curve is a _ _ which means that a consumer has to give up units of good X in order for him to acquire additional unit of good Y.

In other words, more of Y necessitates less of X, thus quantities of X and Y is inversely related. And, any curve, which reflects inversely related variables, is

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downward sloping curve

Front 9

Indifference curves are _

which means that all possible combinations of goods X and Y will yield the same level of utility or satisfaction for the consumer.

This does not mean either they are parallel or they are equidistant from each other.

They may run farther apart at some points and close together in other points

Back 9

nonintersecting

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Indifference curves are

which reflects the relative substitutability of goods X and Y;

it also implies that the rate at which Y can be traded for constant additions of X diminishes as more and more of X is consumed and Y becomes “scarcer.”

Furthermore, this can best be explained by the concept of marginal rate of substitution.

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convex to the origin

Front 11

is the amount of one good or service that a consumer is just willing to give up to obtain an additional unit of another.

It refers to the slope of the indifference curve.

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marginal rate of substitution (MRS)

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The marginal rate of substitution of one product for another, say of X for Y, is abbreviated MRSxy. MRSxy is defined, as the maximum amount of Y the consumer is willing to give up to get an additional unit of X. It is expressed algebraically as

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Front 13

is defined, as the maximum amount of Y the consumer is willing to give up to get an additional unit of X

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MRSxy

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is a set or collection of indifference curves, which represents various levels of satisfaction or utility.

In other words, it is the graphical representation of a consumer’s tastes.

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indifference map

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An indifference curve that lies above and to the right of another indicates a _ level of utility

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HIGHER

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The indifference map (also known as ) can be represented by

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consumer’s preference function

U = f(x, y)

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U - f - X – Y –

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represents levels of preference (expressed in ordinal terms only)

is read “is a function”

is one good

is another good

Front 18

The equation for one indifference curve is

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U1 = f(x, y)

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Where: U1 is

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is a constant (i.e., it represents a given level of preference)

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A budget line represents all combinations of goods and services available to the consumer when all of the consumer’s income is being utilized given his level of income and the prices of the goods or services.

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(purchasing power)

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Indifference curves are convex to the origin which means that goods are

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Substitute

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The constraint on the individual’s consumption activities is shown by budget lines sometimes called

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lines of attainable combinations

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means the quantity of goods and/or services that can be bought with a given level of income and prices of the commodities.

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Purchasing power

Front 24

T/F

an DECREASE in money income will shift the budget line to the right;

a INCREASE in money income will move it to the left.

a decline in the prices of both products – which is the equivalent of an income increase – will shift the curve to the right

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FALSE

Front 25

T/F

To maximize utility, consumers spend all their income or operate on their budget lines. They choose the point at which the budget line and the indifference curve are at tangent at each other -- i.e., MRSxy = Px/Py

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True

Front 26

There are two classification of a change in quantity demanded,

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income effect

substitution effect.

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is the impact on quantity demanded of a change in purchasing power.

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income effect

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is the impact of a pure price change on the quantity demanded of a certain commodity.

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substitution effect