Exam 1 Definitions (from exam study guide & workbook)

Question 1

What are the three assumptions we can make about consumer preferences?

Answer 1

Completeness
Transitivity
More is better

Question 2

Assumption 1: Completeness explanation

Answer 2

Consumer can compare any two bundles of goods (A&B) and say.. A if preferred to B, vice versa and that they are indifferent between the two

Question 3

Assumption 2: Transitivity explanation

Answer 3

For any three bundles (A,B,&C), if A is weakly preferred to B and B is weakly preferred to C, the A is weakly preferred to C

Question 4

Assumption 3: More is better explanation

Answer 4

If bundle A has at least as much of all goods as bundle B & bundle A has more of some good than bundle B, bundle A is preferred

Question 5

Way of indifference curve if Good X & Good Y are perfect substitutes

Answer 5

From origin straight out but on a linear graph

Question 6

Way of indifference curve if Good X & Good Y are perfect complements

Answer 6

From origin straight out but on L shaped lines

Question 7

Way of indifference curve if X is “good” & Y is “bad”

Answer 7

linear lines with positive slope with an arrow heading towards x axis intercepting them

Question 8

Way of indifference curve if X is “good” & Y is “neutral”

Answer 8

straight horizontal lines with arrow going up from bottom line

Question 9

Difference between MRS and MRT

Answer 9

MRS: focuses on demand (aka rate at which consumer is willing to trade a good for another)
-MUx/MUy

MRT: focuses on supply (aka rate at which consumer is able to trade a good for another)
-Px/Py

Question 10

Explain what is being measured on both the vertical and horizontal axes for a price-consumption curve

Answer 10

Vertical axis: Quantity of good Y
Horizontal axis: Quantity of good X

Question 11

Explain what is being measured on both the vertical and horizontal axes for an income consumption curve

Answer 11

Vertical axis: Quantity of good Y
Horizontal axis: Quantity of good X

Question 12

Explain what is being measured on both the vertical and horizontal axes for a demand curve

Answer 12

Vertical axis: Price of good X
Horizontal axis: Quantity of good X

Question 13

Budget constraint

Answer 13

How much of each good given the amount of money

Question 13

Explain what is being measured on both the vertical and horizontal axes for an Engel curve

Answer 13

Vertical axis: Income
Horizontal axis: Quantity of good X

Question 14

Shifts of budget constraint

Answer 14

shifts depend on changes in total money available and change in price of goods

Question 15

Preferences

Answer 15

consumer can prefer one thing over another or can be indifferent about certain bundles

Question 16

Utility

Answer 16

Satisfaction

Question 17

Utility function

Answer 17

measures consumers preferences for a set of goods and services

Question 18

Marginal utility

Answer 18

added satisfaction that a consumer gets from having one more unit of a good or service

Question 19

Law of diminishing marginal utility

Answer 19

marginal utility from each additional unit declines as consumption increases

Question 20

Indifference curves

Answer 20

various combinations of two goods or services that leave the consumer equally well off or equally satisfied

Question 21

Cobb- Douglas

Answer 21

have indifference curves that are downward sloping

Question 22

Perfect substitution

Answer 22

straight line as indifference curve (think apple and orange juice since either way consumer still gets juice)

Question 23

Perfect complements

Answer 23

L shaped indifference curve (think hot dogs & buns… don’t want one without the other)

Question 24

Price consumption curve

Answer 24

shows how a consumers consumption choices change when the price of one of the goods changes

Question 25

Demand curve

Answer 25

relationship between the price of a good or service and the quantity demanded for a given period of time

Question 26

Engel curve

Answer 26

shows the relationship between the amount of money that the consumer has available to spend and quantity of a good that a consumer chooses to buy in their optimal bundle

Question 27

Income consumption curve

Answer 27

shows how the consumers optimal bundle changes when the consumers income changes while holding prices consistent

Question 28

Income effects of a price change

Answer 28

change in the consumption of goods by consumers based on their income a.k.a. purchasing power

Question 29

Substitution effects of a price change

Answer 29

when consumers replace cheaper items with more expensive ones due to price changes or financial conditions

Question 30

Indirect utility function

Answer 30

A function of prices of goods and the consumers income or budget

Question 31

Expenditure function

Answer 31

The minimum amount of money and individual needs to spend to achieve some level of utility given a utility function and prices of available goods

Question 32

Compensating variation

Answer 32

The amount of additional money consumer would need to reach their initial utility after a change in prices

Question 33

necessary conditions

Answer 33

those that must be present for an event to occur

Question 34

Sufficient conditions

Answer 34

A condition or set of conditions that will produce an event