80: Indifference curves and consumer choice

Question 1

indifference curve

Answer 1

line that shows all the consumption bundles that yield the same amount of total utility for an individual

Question 2

indifference curve map

Answer 2

the entire utility function for someone, a collection of indifference curves each corresponding to a different utility level

Question 3

properties of indifference curves for ordinary goods (4)

Answer 3

a) never cross
b) farther from origin –> represents higher level of utility
c) slope downward
d) convex shape

Question 4

marginal rate of substitution

Answer 4

MUx/MUy

Question 5

slope of the I curve

Answer 5

∆Qy/∆Qx = -MUx/MUy

Question 6

diminishing marginal rate of substitution

Answer 6

someone who consumes only a little of good A and a lot of good B will be willing to trade a lot of good B for just one more unit of A

Question 7

properties of ordinary goods (2)

Answer 7

a) consumers require more of one to compensate for less of the other
b) diminishing rate of marginal substitution

Question 8

tangency condition

Answer 8

when the I curve and the BL just touch due to the I curve’s convex shape, determining the optimal consumption bundle

Question 9

where do the I curve and the BL touch?

Answer 9

where their slopes are equal

Question 10

slope of budget line

Answer 10

-Price of Y / price of X

Question 11

relative price of A in terms of B

Answer 11

rate at which A trades for B in the market

Question 12

relative price of A in terms of B equation

Answer 12

Pa / Pb

Question 13

relative price rule

Answer 13

at the optimal consumption bundle, MRS = relative price: MUa/MUb = Pa/Pb