# L6,7,11 Flashcards

1
Q

Substitution effect of a reduction in demand

A

Shift new budget line onto original IC. This generates BL3. Substitution effect is change from e1 to e*.

2
Q

What is substitution effect

A

Change in demand holding other price and utility constant

3
Q

What is income effect

A

Change in demand resulting from change in real income

4
Q

Income effect of a reduction in demand

A

The Income effect is the change from the bundle, e* to the optimal bundle after the change in prices, e2.

5
Q

Substitution effect of a price increase is always?

A

Negative as long as BC is linear and IC convex to origin

6
Q

If a normal good and price increases income effect is?

A

Negative

7
Q

Total effect=

A

Sub effect + Inc effect.

8
Q

Slutsky equation

A

total price elasticity = substitution price elasticity - income elasticity of good x
budget share of good

9
Q

According to Slutsky equation income effect for good will be negligible if?

A

Income elasticity close to 0
Good makes up a small fraction of consumers budget

10
Q

Pros and Cons of consumer surplus

A

Easy to calculate using simple demand functions
However inaccurate as demand functions include income effects

11
Q

3 ways of calculating welfare

A

Consumer Surplus
Compensating Variation - change in income consumer would need to restore his original utility
Equivalent Variation - change in income that would provide an equivalent change to consumers utility

12
Q

Standard model of consumer choice assumes:

A

Individuals have well defined preferences
Can perfectly process all available information
Individuals are willing to select options that maximise their utility

13
Q

Lefmost digit bias

A

consumer pays too much attention to leftmost digit of number e.g. 1.99 rather than 2.00

14
Q

Decoy effect

A

Using an option to make another option look better

15
Q

Loss averse

A

Individual more sensitive to a loss relative to an equivalent gain of same magnitude

16
Q

Choice anomalies

A

Not rational decision

17
Q

Top position or primacy effects

A

more likely to pick option at top of menu or last more likely to be remembered

18
Q