Consumer Behaviour Flashcards
(20 cards)
What are the three characteristics of utility?
1) Utility ≠ usefulness (e.g., Picasso paintings)
2) Subjective (varies by person)
3) Measurable cardinally (utils) or ordinally (rankings)
Why does the first burger provide higher marginal utility than the seventh?
Due to the Law of Diminishing Marginal Utility – satisfaction declines with additional units consumed in a given time period
What happens to total utility when marginal utility becomes negative?
Total utility begins to decline (e.g., 7th burger reduces satisfaction from 30 to 28 utils)
How does the utility-maximizing rule explain consumer equilibrium?
Consumers allocate income so MU_A/P_A = MU_B/P_B (e.g., 2A & 4B in Table 3.1)
Why are newspaper vending machines designed differently from soda machines?
Newspapers have near-zero MU for extra copies; soda has slower MU decline, requiring pay-per-can limits
What two conditions must hold for consumer equilibrium in the cardinal approach?
1) MU_A/P_A = MU_B/P_B
2) Entire budget is spent
How is a demand curve derived from utility theory?
By observing quantity demanded at different prices (e.g., 4B at R2 → 6B at R1 in Figure 3.2)
What does the slope of the budget line represent?
The price ratio of the two goods (-P_B/P_A), e.g., -2 for books (R100) vs. wine (R50)
Why are indifference curves convex to the origin?
Due to diminishing Marginal Rate of Substitution (MRS) – consumers trade less of one good for more of another as quantity increases
What is the equilibrium condition in indifference curve analysis?
MRS = P_B/P_A at the tangency point between budget line and highest IC
How does an income increase affect the budget line?
Shifts the budget line outward (parallel shift), enabling higher utility combinations
Why can’t indifference curves intersect?
Would imply the same combination yields two utility levels, violating transitivity of preferences
How does the substitution effect explain downward-sloping demand?
Lower prices make goods relatively cheaper, increasing quantity demanded (e.g., more B when P_B falls)
What is the key difference between cardinal and ordinal utility?
Cardinal measures utils numerically; ordinal only ranks preferences
Why did Zuckerberg drop out of college?
Opportunity cost of time outweighed marginal utility of degree (higher utility from building Facebook)
What happens to MU/rand when the price of a good decreases?
MU/rand increases (e.g., if P_B falls from R2 to R1, MU/rand doubles), prompting more purchases
How is the Marginal Rate of Substitution (MRS) calculated?
Absolute value of the indifference curve slope (ΔA/ΔB) at a given point
Why does the TU curve peak when MU reaches zero?
MU = 0 means no additional utility is gained (TU stops rising); negative MU reduces TU
What combination maximizes utility for Holly with R10?
2 units of A and 4 units of B (yielding 96 utils)
How do income and substitution effects reinforce the law of demand?
Lower prices: 1) Increase purchasing power (income effect)
2) Make goods relatively cheaper (substitution effect)
