chapter 5

Question 1

mux / px =

Answer 1

muy / py

Question 2

The marginal rate of substitution falls along the demand curve as …

Answer 2

the price of x falls

Question 3

corner points either ..

Answer 3

x = 0 or y = 0

Question 4

When the income consumption curve is positively sloped, the slope of the engel curve is

Answer 4

pos

Question 5

normal good

Answer 5

the consumer purchases more of good x as her income rises

Question 6

inferior good

Answer 6

that the consumer purchases less of good x as her income rises,

Question 7

engel curve is pos =

Answer 7

normal good

Question 8

engel curve is neg =

Answer 8

inferior good

Question 9

substitution effect

Answer 9

change in price affects amount of good bought and consumer tries to achieve same level of utility

Question 10

substitution effect is always …

Answer 10

neg

Question 11

income effect

Answer 11

consumers purchasing power changes and

effect of a change in income

Question 12

price of x falls … (purchasing power…)

Answer 12

purchasing power rises

Question 13

As the price of x rises, all else constant, purchasing power

Answer 13

falls

Question 14

finding intermediate decomposition basket 2 conditions:

Answer 14

must lie on BL parallel to BL2

basket at point where BL is tangent to indff curve U1

Question 15

with baskets income effect is found by …

Answer 15

xc final - xb decomp

Question 16

substitution in baskets found by…

Answer 16

xb decomp - xa intiatl

Question 17

overall effect in basket found by..

Answer 17

xc final - xa inital

Question 18

income and sub effect when goods are normal

Answer 18

income is 0
sub effect is pos

Question 19

giffen good

Answer 19

If a good is so inferior that the income effect outweigh the sub effect, gives upward sloping demand curve

Question 20

giffen good demand curve slopes…

Answer 20

up

Question 21

consumer surplus

Answer 21

difference between what the consumer is willing to pay and what the consumer actually pays

Question 22

compensating variation

Answer 22

maintain utility before price change

Question 23

pos CV =

Answer 23

price reduction

Question 24

neg CV =

Answer 24

price increase

Question 25

equivalent variation

Answer 25

Level of utility they would have after the price change

Question 26

pos ev =

Answer 26

price reduction

Question 27

neg EV =

Answer 27

price increase

Question 28

Compensating and equivalent variations with no income effect (utility function is quasilinear) =

Answer 28

indiff curves are parallel and no income effect

Question 29

market demand

Answer 29

adding the quantities demanded by the individuals (or segments) at each price and plotting this total quantity for all possible prices

Question 30

newtowkr externalitles

Answer 30

If one consumer's demand for a good changes with the number of other consumers who buy the good

Question 31

bandwagon effect

Answer 31

a positive network externality that refers to the increase in each consumer’s demand for a good as more consumers buy the good

Question 32

snob effect

Answer 32

A negative network externality that refers to the increase in consumer’s demand when fewer other consumers have the good