ECO101H1 Lecture 7: TOPIC5TheTheoryofConsumerChoiceLEC7

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11 Oct 2016

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The budget constraint: the limit on the consumption bundles that a consumer can afford. A consumption bundle is a particular combination of the goods. The slope of the budget constraint equals the relative price of the good on the x axis. Below the line the budget is not being maximized but the most possible is being used. A fall in income shifts the budget constraint down. Identify the two new intercepts on the graph. What occurs when the price of one of the good changes. An increase in the price of one good pivots the budget constraint inward. Indifference curve: shows consumption bundles that give the consumer the same level of satisfaction. If the quantity of a good is reduced then one must increase the quantity of the other in order to keep the person equally happy as before the initial reduction. Higher indifference curves are preferred to lower ones.

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1.	_____	The satisfaction or benefit that consumers receive from consuming goods or services.
2.	________________ _	A particular combination of specific quantities of goods or services
3.	________________ _	Consumers can rank all conceivable bundles of goods or services
4.	_____	If A is preferred to B, and B is preferred to C, then A is always preferred to C.
5.	_____	Equation showing a consumerâs perception of the total utility forthcoming from consuming each bundle of goods and services.
6.	_____	A set of consumption bundles each and every one of which provides a consumer with exactly the same level of total utility.
7.	_____	The number of units of Y that must be given up for total utility to remain the same when one more unit of X is consumed.
8.	_____	The addition to total utility attributable to consuming one more unit of a good, holding the consumption of all other goods constant.
9.	_____	The line showing all bundles of goods that can be purchased at given prices if the entire income is spent.
10.	_____	The change in the consumption of a good that would result if the consumer remained on the original indifference curve after the price of the good changes.
11.	_____	The change in consumption of goods results strictly from the change in purchasing power after the price of a good changes.
12.	________________ _	The sum of the substitution and income effects.
13.	_____	A good for which quantity demanded varies directly with price, causing an upward sloping demand curve.
14.	_____	A list of prices and the corresponding quantity consumers are willing and able to purchase at each price.

blushwildebeest943

1.The Phillie Phanatic always eats his ballpark frank in a special way; he uses a foot-long hot dog together with precisely half a bun, 1 ounce of mustard, and 2 ounces of pickle relish. He only gains utility/satisfaction from these 4 items, any extra of a single item without the others is worthless.

What can we say about the relationship among these goods for the Phillie Phanatic and the shape of his indifference curve with respect to these goods?

2. Consider a person with convex indifference curves. When she optimally chooses a consumption bundle of a particular amount of fruit on the Y-axis, and vegetables on the X-axis, her marginal rate of substitution equals:

A. 1

B. PV_/PF (The price of vegetables divided by the price of fruit)

C. P_F/P_V (The price of fruit divided by the price of vegetables)

D. 0

3. A consumer has a budget for food (F) and shelter (S). With income M, and prices PF and PS, the budget constraint for this consumer may be represented as:

A. PSS + PFF = M

B. F = M/PF - (PS/PF)S

C. S = M/PS - (PF/PS)F

D. All of the above

burgundyalpaca580

True or False. If False explain why it's false.

1. If all prices are doubled an money income is the left the same, the budget set does not change because the relative prices do not change.

2. A decrease in income pivots the budget line around the bundle initially consumed.

3. If preferences are well-behaved, then for any commodity bundle (x1,x2), the set of commodity bundles that are worse than (x1,x2) is a convex set.

4. The marginal rate of substitution measures the distance betwee one indifference curve and the next one.

5. If someone has the utility function U= 2min(x, y), then x and y are perfect complements for that person.

6. At the boundary optimum, a consumers indifference curve must be tangent to her budget line.

7. If two goods are substitutes, then an increase in the price of one of them will increase the demand for the other.

8. An Engel curve is a demand curve with the vertical and horizontal axes reversed.

9. An inferior good is less durable than a normal good.

10. When other variables are held fixed, the demand for a Giffen good rises when income increase.

ECO101H1 Lecture 7: TOPIC5TheTheoryofConsumerChoiceLEC7

ECO101H1 Full Course Notes

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