Consumer Theory

Question 1

Total Utility

Answer 1

The satisfaction a consumer gains from consuming a product

Question 2

Marginal utility

Answer 2

The additional satisfaction a consumer gets from an extra unit if a good

Question 3

Diminishing Marginal Utility

Answer 3

The tendency for the additional satisfaction to fall from consuming extra units

Question 4

Downward sloping indifference curve shows:

Answer 4

Imperfect substitutes

Question 5

Decreasing MRS means

Answer 5

People are more willing to trade away goods they have in abundance and vice versa. (Move down the indifference curve)

Question 6

Marginal Rate of Substitution

Answer 6

The rate at which a consumer is willing to trade one good for another

Question 7

MRS formula

Answer 7

MRS = - (MUx / MUy)

Question 8

Perfect substitutes indifference curve shape

Answer 8

Straight, diagonal downward sloping line (MRS is a fixed number)

Question 9

Perfect complements indifference curve shape

Answer 9

Right angle indifference curve. (MRS = 0)

Question 10

Budget Constraints/Lines show

Answer 10

The limit on the consumption bundles that a consumer can afford

Question 11

Budget Equation

Answer 11

X (Px) + Y (Py) = M (income)

Question 12

Budget Constraint Slope Equation

Answer 12

Slope = - (Px / Py)

Question 13

What does a change in price of one good do to a budget line?

Answer 13

Pivots the budget line

Question 14

Where is the consumers optimum (indifference curve and budget line)

Answer 14

Slope of the indifference curve = Slope of budget line
(MRS = Px / Py)

Question 15

If U = U (X , Y), what does MRS =

Answer 15

MRS = - (MUx / MUy)

Question 16

Normal good

Answer 16

A consumer buys more as income rises

Question 17

Inferior good

Answer 17

Consumer buys less when income rises

Question 18

Giffen good

Answer 18

Goods which for a decrease in price, the quantity demanded reduces (upwards sloping demand curve)

Question 19

Substitution effect

Answer 19

When the relative price of a good changes, people seek substitutes so quantity demanded decreases

Question 20

Income effect

Answer 20

When the price of a good or service rises relative to income, people cannot afford all the things they previously bought

Question 21

Effects of Price Increase for a normal good (Indifference curve and budget line)

Answer 21

Substitution effect = negative
Income effect = negative
Total effect = negative

Question 22

Effect of a price increase for an inferior good (indifference curve and budget line)

Answer 22

Substitution effect = negative
Income effect = positive
Total effect = negative

Question 23

Autarky

Answer 23

No trade occurs