Topic 3: Individual choice

Question 1

what do economists use to measure happiness

Answer 1

utility

Question 2

what does the eastern paradox argue

Answer 2

as societies have got increasingly rich, levels of happiness has not continued to increase

Question 3

what is Maslow’s hierarchy of needs

Answer 3

five stage model (pyramid) showing the needs
the bottom includes things such as breathing, food and water.
The top includes things such as morality and creativity

Question 4

what is homo economicus

Answer 4

economic man
we make assumptions on how people are going to think and behave

Question 5

what are axioms of choice

Answer 5

assumptions on how people are going to think and behave

Question 6

what are the six assumptions needed for indifference curves

Answer 6

completeness - people compare and rank possibilities and always make a choice

Transivity - people are consistent with their choices

Rational choice - people choose the bundle they like the most

Non-satiation - more is always better as people can never be sated

Continuous - indifference curves are continuous lines

convexity - indifference curves are convex to the origin. Preventing unrealistic results appearing in our analysis

Question 7

why dod indifference curves have different shapes

Answer 7

based on the preferences of individuals they are modelling

Question 8

what does it mean if you are further to the top right of an indifference curve

Answer 8

more preferred (bigger bundle)

Question 9

what doe the slope of the indifference curve tell you

Answer 9

Marginal rate of substitution
How much a person is willing to trade a good for another whilst keeping utility constant (MRS)

Question 10

What does it mean if the indifference curve is vertical

Answer 10

marginal utility is zero

Question 11

can indifference curves intersect

Answer 11

no

Question 12

what does diminishing MRS mean

Answer 12

MRS decreases as they are willing to sacrifice less of something

Question 13

When we have more of something does an extra unit of it bring us more or less utility

Answer 13

less

Question 14

what happens to indifference curves as income rises

Answer 14

individuals can afford to consume on higher indifference curves, so the curve shifts to the right

Question 15

what is the impact of a lower price on the indifference curve

Answer 15

• with the lower price of one good, more can be afforded with the same income
• budget line shifts to the right

Question 16

What does an indifference curve show

Answer 16

The combination of goods with the same total utility

Question 17

If a budget line is tangent to an indifference curve, what does this mean

Answer 17

This is the highest indifference curve where the whole income is spent

Question 18

What equation should we use when determining if goods on budget lines/indifference curves are complements or substitutes

Answer 18

Cross price elasticity of demand

Question 19

What equation should we use when determining if goods are normal or inferior

Answer 19

Income elasticity of demand

Question 20

Why can indifference curves not cut each other

Answer 20

Each indifference curve represents a different level of satisfaction

Question 21

What does an indifference curve moving towards or away from origins signify

Answer 21

Towards - decreasing utility
Away - increasing utility