Introduction And Consumer Theory

Question 1

Budget constraint

Answer 1

Identifies what consumers can afford to buy

Question 2

Consumer theory - what is it about?

Answer 2

Understanding how changes in budget constraint influence consumption

Question 3

What is the “Standard consumer problem”

Answer 3

Bundle (x,y) can only be purchased if

PxX + PyY <= M

I.e income (M) has to be greater than bundle price.

Question 4

How can we find equation for budget constraint

What is slope and intercept?

Answer 4

Rearrange the bundle (previous slide) making y subject
Y= m/Py - PxX/Py

M/Py = y intercept
-Px/Py = slope

Question 5

What does the slope of the budget line represent, and formula?

2. How can we math it? (Pg16) or just remember final equation.

Answer 5

Opportunity cost - the benefit lost from the next best alternative. (Give up good y to have more of good X)

2. Creates new equation with Δ , then uses simultaneous equations. Or just remember final equation Δy/Δx = -Px/Py

Question 6

Factors influencing budget constraint’s intercept and slope. (1 for each)

Answer 6

Changes in income - SHIFT BY INTERCEPT (As impacts M in M/Py)

Changes in price - Changes slope as -Px/Py

Question 7

2 types of taxes

Answer 7

VALUE ADDED TAX (AD VALOREM)
QUANTITY TAX

Question 8

Value added tax equation

Answer 8

(1+t)P

P is price of good
T is tax

Question 9

Quantity tax equation.

Answer 9

P+t

Question 10

Price paid by buyers (Pd)

Answer 10

Pd = Ps + t

I.e buyers pay a higher price than sellers receive because of the tax
Pd is price paid by buyers
Ps is price paid by sellers

Question 11

2 types of subsidies

Answer 11

Value subsidy - gov gives back a % of purchased good or service

Quantity subsidy - per purchased unit

Question 12

Value subsidy

Answer 12

(1-σ)p

Question 13

Quantity subsidy equation

Answer 13

P-s

Question 14

Price paid by buyers in a subsidy (Pd)

Answer 14

Pd=Ps - subsidy

Buyers (Pd) pay a lower price than sellers receive
Price paid by sellers Ps

Question 15

Lump-sum tax

Answer 15

Government takes away a fixed amount regardless of consumers behaviour.

Question 16

What will this do to the budget line on the graph

Answer 16

Budget line shifts inward as fall in income (M)

Question 17

What is rationing?

Learn the budget constraint graph with rationing (of good X in this case) pg 28

Answer 17

When maximum level of consumption is fixed for a good.

In the graph, green shaded area represents budget set, goes up to Xbar (the max ration)

Question 18

What if we combine taxes, subsidies and rationing?

Learn graph taxing consumption above a certain quantity (of good X in this case) pg 29

Answer 18

Good x can be consumed at price p below quantity Xbar (max ration) and a tax can be introduced so cost is now (p+t) for any additional unit above the ration.

Graph when it reaches Xbar (max ration), slope gets steeper, since a tax is charged on units above Xbar. (Slope becomes -(px+t)/py

Question 19

Budget set vs budget line

Answer 19

Budget set shows all possible combinations that can be purchased with the given budget. (Area under budget line)

Budget line shows all possible combinations that can be purchased using ALL of the revenue. (Along the line)