Consumer Behavior

Question 1

Consumption Bundle

Answer 1

Bundle consists of goods and services purchased per period

Question 2

4 Assumptions regarding decisions made by rational consumers:

Answer 2

1) Completeness and Rankability: Consumers can compare any possible
bundle of goods and they can rank them
2) Transitivity: Consistent ranking of choices exists
3) More is better: All else equal, having more of a good is better than
having less
4) Moderation is preferred to extremes: People prefer variety

Question 3

Utility Function

Answer 3

-Mathematical representation of preferences
-The relationship between a person’s consumption bundle and the total utility it creates for that person

Question 4

Marginal Utility (MU)

Answer 4

The additional utility a person gets by consuming 1 more unit of a good (holding consumption of everything else constant)

Question 5

Indifference Curve

Answer 5

A line that maps consumption bundles yielding the same amount of total utility
- Consumers are indifferent between bundles on the same curve

Question 6

Marginal Rate of Substitution (MRS)

Answer 6

-MRSXY is the amount of good Y (salad) a person is willing to trade for
one unit of good X (pizza)
-MRSXY is the negative of the SLOPE of the indifference curve
-Total Utility can’t change, but Marginal Utility can -> variety
-MRSxy = MUx/MUy
-How much Y is given up to gain one more X

Question 7

Slope of Budget Constraint

Answer 7

-The relative price of Good X (in terms of Good Y)
-The amount of Good Y (salad) that the consumer is able to trade for 1 unit of Good X (pizza)

Question 8

Movement of BC

Answer 8

-If income rises-> the Budget Constraint (BC) shifts out in parallel manner to BC’
-Price of X fall-> BC rotates out along the x-axis to BC’

Question 9

Budget Constraint

Answer 9

-Shows what trades consumer is ABLE to make
-(-Px/Py) = slope of the budget constraint

Question 10

Lagrangian Shortcut

Answer 10

X = alpha*Income/Px
Y =(1-alpha)Income/PriceY

Question 11

Lambda

Answer 11

Lambda = MUx/Px = MUy/Py

Question 12

Individual to Market Demand Curves

Answer 12

Horizontally sum to add the units on horizontal axis (usually quantity
Q) when everyone faces the same the unit of the vertical axis (such as a price P, or marginal cost MC)
-choke price is more or less the same as quantity pushes out