ECO-4 Lecture Notes - Lecture 15: Relative Price, Indifference Curve, Demand Curve

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11 Sep 2020

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When prices changes budget line changes. The lower the price of the good (x), the flatter is the budget line (rotate outwards) = decreased opportunity cost (moving from left-right with respect to x) = relative price falls (opportunity cost falls) The higher price of a good (of x axis), the steeper is the budget line (rotate inwards) = increased oc. Budget line shifts but slope does not change. A household"s preferences determine the utility received from consuming a good or service. Utility: the benefit or satisfaction from consuming a good or service. Indifference curve : line that shows combinations of goods among which a consumer is indifferent. The further away the point (curve) is from the origin, the more she prefers it. Marginal rate of substitution (mrs) : rate @ which a person will give up good y to get an additional unit of good x while remaining indifferent (remaining on same indifference curve)

Related Questions

budget line

marginal utility

complete property of preferences

market demand

consumption bundle

substitution effect

Giffen good

total effect

income effect

transitive property of preferences

indifference curves

utility

the marginal rate of substitution

utility function

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.

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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.

Consider an individual making choices over two goods, x and y with prices px and py, and who has income:

Suppose that, as a result of changes in the individual's economic circumstances, the budget line rotates outward, with the vertical (good y) intercept remaining unchanged but the horizontal (good x) intercept shifting to the right. Explain how this could have happened if the price of good x did not change?

If the individual's utility function is u(x; y) = x 2 + 4y 2 , are these preferences convex? Are they monotonic? Explain.

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ECO-4 Lecture Notes - Lecture 15: Relative Price, Indifference Curve, Demand Curve

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