Intermediate Microtheory. Lecture 5

Front 1

Tells us how various bundles are ranked in order of consumer's level of satisfaction

Back 1

Utility Function/Indiffernce Curves

Front 2

__________ tells us which bundles are affordable by the consumer

Back 2

Budget Constraint

Front 3

MRS > price ration MUx/Px>MUy/Py

The last dollar spent on X generates more utility that the last dollar spent on Y.

With the same income, consumer can make himseld better off by shifting consumption toward more X, less Y, ie. move from B to A

Back 3

Bundle B

Front 4

MRS < price ratio MUx/MUy<Px/Py

The last dollar spent on X genrates less utility that the last dollar spent on Y.

With the same income, consumer can make himself better off by shifting consumption toward less X, more Y, ie. move from C to A

Back 4

Bundle C

Front 5

MRS = price ration, but this is not the optimum. Consumer is not using up all his money. Can make himself better off by spending everything.

Back 5

Bundle D

Front 6

MRS = price ratio, but bundle is not affordable

Back 6

Bundle E

Front 7

If a consumer has positive marginal utility for each of the two goods, the consumer will choose a basket on the budget line because

Back 7

an optimal consumption basket must be located on the budget line

Front 8

The impact of change in income on the location of the budget line is

Back 8

- Decrease in income would shift the budget line inwards in a parallel manner reducing the choices available to the consumers.

- Increase in income would shift the budget line outwards in a parallel manner expanding the choices available to the consumers.

Front 9

If the price of one of the goods purchased by the consumer increases

Back 9

The vertical intercept on the budget line would remain unchanged. However, the horizontal intercept decreases moving the location of budget line towards the origin

Front 10

The theory of consumer choice

Back 10

describes how a consumer allocates her limited income among available goods and services

Front 11

The difference between interior optimum and corner point optimum

Back 11

Interior optimum refers to an optimum basket of products at which consumers will purchase positive amounts of all commodities. Corner Point optimum refers to the optimal basket where one or more goods is not purchased at all.

Front 12

At an optimal interior basket,

Back 12

The slope of budget line equals the slope of indifference curve

Front 13

At an optimal interior basket, the budget line...

Back 13

Is just tangent to the indifference curve and therefore the slope of budget line is less than the slope of indifference curve.

Front 14

The marginal utility per dollar spent may vary across the goods at a corner point because

Back 14

- Some goods may not be consumed.

- The budget line may not be tangent to the indifference curve.

Front 15

A consumer with income of $1000 finds that basket A maximizes utility subject to his budget constraint and realizes a value of utility U1.

Back 15

Basket A will also minimize the expenditure necessary to realize a level of utility U1.

Front 16

A composite good is

Back 16

A good representing the collective expenditure on all goods excepting the commodity under consideration.

Front 17

Revealed preference analysis helps in

Back 17

The consumer could increase utility by consuming more of good and less of good

Front 18

Revealed preferences tells us that if basket and basket lie on the same budget constraint but the consumer chooses instead of , then we know that

Back 18

is at least as preferred to .

Front 19

Revealed preferences tells us that if basket costs less than basket but the consumer chooses instead of , then we know that

Back 19

is strictly preferred to .

Front 20

Which of the following assumption(s) are necessary for revealed preferences?

Back 20

- Utility maximization.
- More is preferred to less.
- Transitivity.
- All of the above are assumed