Consumer Behavior A

Question 1

A rational consumer purchases the goods and services which they

Answer 1

• “like best”;
• “can afford”.

Question 2

What does “like best” mean?

Answer 2

The concept of preferences

Question 3

What does “can afford” mean?

Answer 3

The concept of budget constraint

Question 4

Assumption consumer behaviour

Answer 4

Consumers have preferences over consumption bundles

Question 5

a consumption bundle

Answer 5

• is a set of quantities of different goods or services
• consists of several goods
• can be preferred to another consumption bundle

Question 6

Strict preference

Answer 6

Consumption bundle A is strictly preferred to B, i.e. A ≻ B.

Question 7

Weak preference

Answer 7

Consumption bundle A is weakly preferred to B, i.e. A ≿ B.

Question 8

Indifference

Answer 8

The consumer is indifferent between the two consumption bundles, i.e.
A ∽ B ⇔ A ≿ B and B ≿ A.

Question 9

ASSUMPTIONS ABOUT CONSUMER PREFERENCES

Answer 9

Completeness
Non-satiation (also: monotonicity)
Transitivity

Question 10

Completeness

Answer 10

for all consumption bundles it holds that A ≿ B or B ≿ A or both (for indifference).
* Intuition: a consumer can compare any two consumption bundles.

Question 11

Non-satiation (also: monotonicity)

Answer 11

Definition: for the consumption bundles A and B it holds that: if A ≥ B, then A ≿ B; if A > B, then A ≻ B.
* Intuition: if bundle A contains at least as much of each good as (strictly more than) bundle B, it is weakly (strictly) preferred to B.

Question 12

Transitivity

Answer 12

• Definition: for three consumption bundles A, B, C it holds that: if A ≿ B and B ≿ C, it must also hold that A ≿ C.
• Intuition: a consumer decides consistently.

Question 13

An indifference curve

Answer 13

shows the set of all consumption bundles among which the consumer is indifferent.

Question 14

All the consumption bundles “above” an indifference curve are

Answer 14

preferred to the consumption bundles on the indifference curve

Question 15

Indifference curves cannot..

Answer 15

cross (because of the Transivity assumption)

Question 16

INDIFFERENCE CURVES FOR PERFECT SUBSTITUTES

Question 17

INDIFFERENCE CURVES FOR PERFECT COMPLEMENTS

Question 18

INDIFFERENCE CURVES FOR A NEUTRAL GOOD

Question 19

INDIFFERENCE CURVES FOR A “BAD”

Question 20

Preferences are (strictly) convex if …

Answer 20

the slope of the indifference curves decreases along the curve.

Question 21

Intuition

Answer 21

consumer prefer variety; the more they have of a particular good, the more units they are willing to give up of that good to get additional units of another good.

Question 22

A utility function

Answer 22

assigns a utility (a numerical value) to each consumption bundle. Higher utilities are assigned to preferred consumption bundles.

Question 23

The utility function describes only the ranking of the consumption bundles, i.e. utility is an ordinal concept:

Answer 23

– no cardinal interpretation possible (how much better is A?).
– any transformation that preserves the ranking (“monotonic
transformation”) is possible (see below).
– the absolute utilities have no interpretation.
– interpersonal utility comparisons are not possible.

Question 24

Linear:U(X,Y)=aX+bY,with a,b>0.

Answer 24

– The indifference curves are downward sloping straight lines.
– Perfect substitutes

Question 25

Minimum: U(X, Y) = min{aX, bY}, with a, b > 0.

Answer 25

– The utility depends on the quantity of only one of the goods. – Indifference curves are L-shaped (“Leontief”). – Perfect complements.

Question 26

Cobb-Douglas: U(X, Y) = XαY1−α, with 0 < α < 1

Answer 26

– is particularly appropriate for simple calculations. – Indifference curves are strictly convex.

Question 27

CES: U(X, Y) = (Xρ + Yρ)1/ρ

Answer 27

– particularly flexible. – Indifference curves: straight lines (ρ = 1), convex (ρ → 0) or L-shaped (ρ → −∞).

Question 28

A monotonic transformation of a utility function is...

Answer 28

a utility function that represents the same preferences as the original utility function --> transforme l'ecriture sans changer l'orde (toujours que le panier preféré de la fonction soit dans le meme orde)

Question 29

represent a monotonic transformation by a function

Answer 29

f(U), with f′(U) > 0, that transforms each utility level U into some other utility level f(U), such that U(A) > U(B) also implies f(U(A)) > f(U(B)).

Question 30

A transformation which changes the form of the indifference curves cannot...

Answer 30

be monotonic.

Question 31

marginal rate of substitution (MRS)

Answer 31

the slope of the indifference curve

Question 32

Find the marginal utility of each good

Answer 32

ΔU is the change in utility (the additional satisfaction) /ΔQ is the change in quantity consumed (typically 1 unit)

Question 33

cobb douglas function with x^ a 1 x^b

Answer 33

a + b = 1