B| Indifference Curves Flashcards
(50 cards)
What is the general shape of an indifference curve?
Downward sloping, steeper on the left and flatter on the right
What is the concept of indifference curves?
Tradeoffs to any household choice
______ each indifference curve shows the combinations of leisure and income that provide a certain level of utility.
Labor-Leisure Choice
In an ________ each indifference curve shows the combinations that provide a certain level of utility.
Intertemporal Choice
________ provide the basis for a more in depth look at complementary motivations that arise in response to a change in price, wage, or rate of return.
Indiffrence Curves
what do indifference curves illiminate the need of?
Placing numerical values on utility
the process of making utility maximizing decisions
all points along a single ______ curve provide the same level of utility.
indifference
Higher indifference curves indicate a _____ level of utility.
Higher
Why do indifference curves slope downward?
because utility is to remain the same;
reduction /increase in quantity on the vertical axis must be counterbalanced by and increase/reduction of the quantity of the good on the horizontal axis.
Why are indifference curves steeper on the far left and flatter on the far right?
Because of the law of diminishing marginal utility.
What are two effects the change in the price on any good has?
- a substitution effect
2. Income effect
What does an indifference curve show on a budget constraint diagram?
The tradeoffs between two goods
the ______ choice along a budget constraint will be the point of tangency where the budget constraint touches an indifference curve at a single point.
Utility maximizing choice.
The _____ effect motivation encourages a utility maximizer to buy less of what is relatively more expensive and more of what is relatively cheaper.
Substitution effect
The ______ effect motivation encourages a utility maximizer to buy more of both goods if utility rises or less of both goods if utility falls. (Both Normal Goods)
Income Effect
What is the substitution of a wage increase?
Choose more income; less expensive to earn
Less Leisure; Since opportunity cost has risen
What is the income effect of a wage increase?
Choose more income and leisure; since they are both normal goods
In the _________ every interest rate change has a substitution and income effect.
Intertemporal Consumption Choice
What is the substitution effect of an interest rate increase?
more future consumption; cheaper now
less present consumption; since opportunity cost of present consumption in terms of what is given up in the future has increased.
What is the income effect of an interest rate increase?
More of both present and future consumption; since they are both normal goods
What are two similarities with indifference curves?
- They are downward sloping from left to right
- They are convex with respect to the origin
——In other words——
Steeper on the left and flatter on the right
the ______ of the indifference curve means a trade off of one less of a good is necessary to get more of the other, while holding utility constant.
downward slope
What is the reasoning behind an indifference curve that is steeper onthe left and flatter on the right?
Dminishing marginal utility
How does the marginal rate of substituion apply to the indifference curve?
it is the rate at which a person is willing to trade one food for another so the utility will remain the same.
