consumer choice

Question 1

total utility

Answer 1

the satisfaction a consumer gains from consumption of
a good

Question 2

marginal utility

Answer 2

the additional utility gained from the consumption
of one extra unit of the good

Question 3

Diminishing marginal utility

Answer 3

the consumption of each additional good leads to less satisfaction than the previous good

Question 4

preferences

Answer 4

Comparison ~ we can compare and decide which one we prefer or prefer both of them (say indifferent) (for 2 options only) eg A>C
 Transitivity ~ we have some internal consistently, so we just have a preference for one concept (for 3+ options) eg A>B, B>C, so A>C
 Monotonicity ~ more is better than less (for 2+ options) eg B>C

Question 5

properties of indifference curves

Answer 5

Properties of indifference curves
 Cannot cross each other
 Higher the curve higher the utility gained

Question 6

marginal rate of substitution

Answer 6

The rate if which consumers are willing to substitute one good for another

MRS depends on marginal utility of 2 goods,
MRs value will be negative as the indifference slope is negative For two goods x and y, MRS = MUx/ MUy

Question 7

budget constraint

Answer 7

When consumers are on a budget, they have a limit which they cannot surpass.

Changes to the budget constraint are due to:
Income
 Price - increase in a good’s price means lower max consumption

Question 8

consumer’s optimal choice/most utility

Answer 8

combine indifference curve with the budget constraint

The point of which the highest point of the indifference curve and the budget constraint touch is called the point of tangency, eg point A
As the point of tangency is the optimal consumption, both the indifference curve and the budget constraint have the same gradient.
MUx Px = MUy Py

Question 9

substitution effect

Answer 9

The change in consumption is due to a change in relative price of goods
 Good costs less, leads to more consumption of the cheaper goods
and less consumption of the expensive good

Question 10

income effect - change in consumer purchasing power

Answer 10

Leads to increase in consumption for normal goods
 Leads to decrease in consumption for inferior goods
 Leads to more consumption of both goods for a price fall
Indifference curves moves upwards

 Leads to less consumption of both goods for a price rise
Indifference curves moves downwards