L3-L5

Question 1

Completeness

Answer 1

Consumer prefers one of the bundles or is indifferent between them

Question 2

Transitivity

Answer 2

If consumer prefers A to B and B to C then prefer A to C. Same if they are indifferent

Question 3

Non Satiation (Monotonicitiy)

Answer 3

Marginal increase in quantity of a good increases consumer utility (more is better)

Question 4

MRS

Answer 4

Gradient of an IC. The maximum amount of one good consumer is willing to sacrifice in order to obtain one unit of another good. MRS diminishes as gradient of IC gets flatter

Question 5

How to calculate MRS

Answer 5

= dy/dx = -(du/dx)/(du/dy) = -MUx/MUy

Question 6

MRT

Answer 6

Gradient of a BC. How much of one good has to be sacrificed in order to gain another

Question 7

How to calculate MRT

Answer 7

-px/py

Question 8

Interior Solution

Answer 8

Where indifference curve is tangent to BC at optimal point. MRS = MRT. Optimal quantities are positive for both goods

Question 9

How to maximise utility function subject to BC

Answer 9

1. Find optimal ratio (MRS=MRT)
2. Insert optimal ratio in BC

Question 10

Corner Solutions

Answer 10

Highest IC consumer can reach where optimal quantity of one of the goods is 0. MRS is > or < MRT

Question 11

Normal Good

Answer 11

dqy/dM > 0

Question 12

Inferior Good

Answer 12

dqy/dM < 0

Question 13

Substitutes

Answer 13

dqx/dpy >0

Question 14

Complements

Answer 14

dqx/dpy < 0

Question 15

Independent goods

Answer 15

dox/dpy = 0

Question 16

Ordinary good

Answer 16

Demand falls as price increases. dqy/dpy < 0

Question 17

Giffen good

Answer 17

Demand increases as price increases. dqy/dpy > 0

Question 18

Income elasticity of demand

Answer 18

% change in D for a good from a 1% increase in Income. Change in qy/ % change in M. +ve if normal good

Question 19

Cross price elasticity of demand for good Y

Answer 19

% change in demand of Y from a 1% increase in price of good X. +ve if substitutes -ve if complements