Rational Consumer Choice

Question 1

What is a budget constraint

Answer 1

The set of all bundles of goods that exactly exhausts consumer’s income at given prices

Question 2

What is the slope of a budget constraint

Answer 2

The -ve of Px/ Py

Question 3

What happens to the budget constraint if the price of good X (energy) doubles

Answer 3

It pivots inwards about the Y axis

Question 4

What happens to the budget constraint if incomes halve

Answer 4

Inward shift so now can consume half of good X and good Y

Question 5

What is the best affordable bundle for a consumer

Answer 5

The point of tangency between the highest IC and the budget constraint

Question 6

What is a corner solution

Answer 6

• When you choose to consume zero of one good and none of another
• Occurs when there is perfect substitutes

Question 7

What is the income consumption curve

Answer 7

for a good X is the set of
optimal bundles traced on an indifference map as income varies
(holding the prices of X and Y constant).

Question 8

What is an engel curve

Answer 8

Curve that plots quantity of x consumed against income

Question 9

Explain the engel curve for essential, luxury and inferior goods

Answer 9