ECON 2010 Chapter Notes - Chapter 21: Budget Constraint, Indifference Curve, Substitute Good

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ECON 2010 Full Course Notes

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Mankiw chapter 21 the theory of consumer choice. 21-1 the budget constraint: what the consumer can afford. People consume less than they desire because they are constrained by their budget. Budget constraints are the limits set on the consumption of bundles that a consumer can afford. It represents the tradeoffs a consumer faces for two different goods. The slope of a budget constraint measures the rate at which the consumer can trade one good for another. The slope is calculated as the change in vertical distance divided by the change in horizontal difference (rise/run). The slope of the budget constraint equals the relative price of the two goods. Relative price is the price of one good compared to the price of the other. If you offer a consumer two different types of bundles they will choose the one that suits their tastes. However, if their tastes are the same, then they are indifferent between the two bundles.

Related Questions

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

a) If utility is given by u(x; y) = x + y, are the tastes represented homothetic? Are the tastes quasi-linear? Explain.

b) Donald says that since all consumers face the same prices, their budget constraints all have the same slope, and so they should all consume roughly the same quantities of goods if their incomes were the same. Barry disagrees. Who is right and why?

suppose you are given a coupon for pizza. This coupon lowers the price for each additional pizza you buy by 5%. What happens to your budget constraint (compared to the budget with no coupon). Explain.

lilacotter512

1. Economists use indifference curves to characterize the preferences of a rational consumer. There are some plausible assumptions that lead to a set of âwell-behavedâ (i.e., downward-sloping and strictly convex) indifference curves. Which one of the following is NOT among the assumptions?

a. All goods must be economic âgoods.â

b. Preferences are complete.

c. Preferences are transitive.

d. All goods are normal goods

2. Given the prices of good X and Y, the (negative of the) slope of the budget constraint (i.e., - PX/PY) measures

a. the amount of good Y the consumer is willing to forgo in order to consume one more unit of good X.

b. the ratio of the consumer's income to the price of the X good.

c. the quantity of the Y good that must be forgone in order to purchase one more unit of the X good.

d. the quantity of the X good that must be forgone in order to purchase one more unit of the Y good.

3. Which of the following statements is incorrect for an inferior good?

a. An inferior good may have an upward-sloping demand curve.

b. The income elasticity of demand for an inferior good is negative.

c. An inferior good is an economic âbad.â

d. All of the above.

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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ECON 2010 Chapter Notes - Chapter 21: Budget Constraint, Indifference Curve, Substitute Good

ECON 2010 Full Course Notes

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