Chapter 2 - Consumers

Question 1

Consumer’s preferences can be described by…

Answer 1

a ranking over all possible combinations of A and B

Question 2

indifference curve

Answer 2

the line connecting all such points about which we are indifferent from choosing A or B

Question 3

features of indifference curves

Answer 3

downward-sloping: need more of a product to compensate us for less of the other (“more is better”)
farther from the origin = higher levels of satisfaction

Question 4

budget set

Answer 4

what the consumer can afford
with 2 products, a budget set can be expressed by:
p1q1+p2q2 ≤ Y

Question 5

movements/shifts of the budget line

Answer 5

• increase income = budget line shifts out to the right
• if you increase p1 the line rotates inwards with respect to product 1’s quantity axis
• > buy less product with the same income
• > same thing for product 2

Question 6

Consumers always want to maximise their utility. Then the consumer’s best choice is…

Answer 6

… the combination of goods that allows them to reach the highest indifference curve given their budget constraint.

Question 7

demand curve

Answer 7

gives the quantity demanded of a given good as a function of its price and of other factors

Question 8

inverse demand function

Answer 8

denotes what the price must be if the quantity demanded is to be equal to q.
demand as a function of q; p(q,z)

Question 9

a change in price leads to a (1) along the demand curve; a change in other factors leads to a (2) in the demand curve itself

Answer 9

1. movement

2. shift

Question 10

willingness to pay

Answer 10

the maximum price (in dollars) at which you would still want to buy the product

Question 11

consumer surplus

Answer 11

the difference between the willingness to pay and price.

Question 12

Price elasticity of demand

Answer 12

measurement of the sensitivity of demand to changes in price

the ratio between the percentage change in quantity and the percentage change in price, for a small change in price

Question 13

price elasticity of demand formula

Answer 13

Question 14

demand elasticities are generally negative, as…

Answer 14

…an increase in price leads to a decrease in demand

Question 15

|ϵ|>1

Answer 15

elastic demand

demand is very sensitive to price

Question 16

zero< |ϵ| <1

Answer 16

demand is inelastic

quantity demanded is relatively insensitive to price

Question 17

elasticity along the demand curve

Answer 17

Question 18

Cross-price elasticity

Answer 18

measures the sensitivity of demand to the price of another product

Question 19

the cross price elasticity of product x with respect to product y is given by the ratio of the percentage change in the quantity demanded of product x to the percentage change in the price for product y

Answer 19

Question 20

cross-price elasticity is positive

Answer 20

substitutes

Question 21

cross-price elasticity is negative

Answer 21

complements

Question 22

income elasticity

Answer 22

percentage change in quantity demanded induced by a 1% change in income

Question 23

inferior goods

Answer 23

negative income elasticities

Question 24

normal goods (luxury and necessities)

Answer 24

positive income elasticities
luxury goods = i.e. greater than one
necessities = i.e. between 0 and 1

Question 25

income elasticity formula

Answer 25

η = (Δq/q)/(ΔY/Y)

Question 26

identification problem

Answer 26

states that market data results from a combination of demand-curve and supply-curve shifts; if only one would shift around, we would be able to identify the other one

Question 27

the price elasticity of demand tends to be higher for...

Answer 27

... luxuries, for narrow product categories, and in the long run