Consumer behaviour

Question 1

Sum up the consumer demand theory in four points.

Answer 1

1. ) We assume that rational consumers seek to maximise utility given scarce resources
2. ) Utility is based on exogenous prefernces
3. ) Resources are represented by a budget constrain which is determined by a combination of exogenous prices and income
4. ) The demand of individuals is endogenous given prices

Question 2

What are four assumptions we make about a consumers preference?

Answer 2

1. ) Completeness and rankability
2. ) Monotonicity
3. ) Transitivity
4. ) The more a consumer has of a particular good, the less she is willing to give up of something else to get even more of that good

Question 3

Define consumption bundle.

Answer 3

A set of goods or services a consumer considers purchasng

Question 4

What does the assumption completeness and rank ability imply?

Answer 4

Consumers can compare bundles of goods and choose the one they prefer

Question 5

What does the assumption of monotonicity imply?

Answer 5

For most goods, more is at least as beneficial as the current consumption

Question 6

What does the assumption transitivity imply?

Answer 6

Consumers rankings of goods are consistent. If they prefer A to B and also B to C, then she will prefer A to C

Question 7

What does the assumption the more a consumer has of a particular good, the less she is willing to give up of something else to get even more of that good imply?

Answer 7

Consumers like variety

Question 8

Define utility.

Answer 8

Utility is a measure of how satisfied a customer is

Question 9

Define utility function.

Answer 9

A utility function is a mathematical function that describes the relationship between what consumers actually consumer and their level of well-being

Question 10

Define marginal utility.

Answer 10

Marginal utility is the additional utility a consumer receives from an additional unit of a good or service

Question 11

What can we derive from utility?

Answer 11

Indifference

Question 12

Define indifferent.

Answer 12

The special case in which a consumer derives the same utility level from each of two or more consumption bundles

Question 13

What are the two types of ranking of consumption bundles?

Answer 13

Ordinal and cardinal rankings

Question 14

What is the difference between ordinal and cardinal rankings?

Answer 14

Ordinal is where you can line them up from best to worst, where as cardinal can tell you exactly how much better good is from another

Question 15

What three things does Marshallian cardinal utility assume?

Answer 15

1. ) The cardinal measurement of utility is called utils
2. ) Diminishing marginal utility of consumption
3. ) A constant marginal utility of money income

Question 16

What does the Marshallian cardinal utility state?

Answer 16

Rational individuals choose their quantity demanded in order to maximise their level of utility, subject to constraints imposed by their income and price levels

Question 17

What is the optimal condition for marshalling cardinal utility?

Answer 17

The gain from consumption = The loss from the price of the consumption, marginal benefit of the consumption = marginal cost

Question 18

Define the indifference curve.

Answer 18

A mathematical representation of the combination of all the different consumption bundles that provide a consumer with the same utility

Question 19

What are four assumptions of the indifference curve?

Answer 19

1. ) Ordinal measurement of utility
2. ) No unit of utility measurements
3. ) Rational individuals choose their quantity demanded to maximise their utility subject to any constraints
4. ) There is a budget constrain

Question 20

Why can we always draw indifference curves?

Answer 20

Assumption of completeness and rankability,

Question 21

Why can you look at different indifference curves and say which have higher utility levels?

Answer 21

The monotonicity assumption meaning you just choose the curve furthest to the right

Question 22

Why do indifference curves slope downwards?

Answer 22

If the curve did slope up, this would mean that a consumer would be indifferent between a particular bundle and another nudge with more of both goods, can’t be true because of the monotonicity assumption

Question 23

Why can indifference curves never cross?

Answer 23

The transitivity assumption, if they intersect it implies that the same bundle offers two different utility levels, which can’t be the case

Question 24

What are three assumptions of the budget constraint line?

Answer 24

1. ) Each good has a fixed price
2. ) The consumer has a fixed income available to spend
3. ) The consumer can’t borrow or save and so will spend the entire income on the two goods

Question 25

What model do we use to incorporate prices and consumer income?

Answer 25

Budget constraint model

Question 26

Define budget constraint.

Answer 26

A curve that describes the entire set of consumption bundles a consumer can purchase when spending all income

Question 27

What is the equation for the budget constraint (Income =) ?

Answer 27

Income = PxQx + PyQy

Question 28

Define a feasible bundle.

Answer 28

A bundle that the consumer has the ability to purchase lies on or below the consumers budget constraint line

Question 29

Define an infeasible bundle.

Answer 29

A bundle that the consumer cannot afford to purchase, lies to the right and above a consumers budget constraint line

Question 30

What do you have to rearrange the budget constraint equation to to plot it?

Answer 30

Qx

Question 31

What is the slope of the budget constraint line?

Answer 31

-Px/Py

Question 32

What changes the slope of the budget constraint line?

Answer 32

Changes in the relative prices, is the price of good x doubles the slope will be twice as steep where as if the price of good Y doubles the slope will be half as steep

Question 33

If the budget line changes slope or shifts what happens to the number of feasible bundles.

Answer 33

If any part moves towards the left then there will loss of feasible bundles

Question 34

What causes a shift int he budget constraint line?

Answer 34

A decrease in income because then you can buy less of both of the goods

Question 35

What happens if the income and prices go up proportionally?

Answer 35

There is no change to the budget constraint line

Question 36

What are three reasons you get kinks in the budget constraint line?

Answer 36

1. ) Quantity discounts 2. ) Quantity limits 3. ) Non-linear prices

Question 37

Draw the a budget constraint line.

Answer 37

Picture

Question 38

Draw a kinked budget constrain line.

Answer 38

Picture

Question 39

How do quantity discounts effect the budget constrain line?

Answer 39

The slope will become steeper at the end which the cheaper good

Question 40

Is being on a higher or lower indifference better?

Answer 40

Higher

Question 41

What is the slope of the indifference curve called?

Answer 41

The marginal rate of substitution

Question 42

Draw an indifference curve.

Answer 42

Picture

Question 43

Define marginal rate of substitution.

Answer 43

The rate at which a consumer is willing to trade off one good X for another food Y and still be left equally well off

Question 44

Whats the equation for marginal rate substitution?

Answer 44

MRS = -∆Y/∆X

Question 45

Why is marginal rate of substitution usually positive even though the equation has a minus sign?

Answer 45

Because the slope is usually negative so they will cancel out

Question 46

How do we move along an indifference curve and what remains the same when we do so?

Answer 46

Change out consumption, utility remains the same

Question 47

What is marginal rate of substitution the inverse off?

Answer 47

The inverse ration of the marginal utilities we get from each good

Question 48

What is the equation for marginal rate substitution relating marginal utilities?

Answer 48

MRS = MUx/MUy

Question 49

What does it mean if the indifference curve is steep?

Answer 49

The consumer is willing to give up a lot of good Y to get a small additional amount of good X

Question 50

What do we add to the indifference curve to find the optimal point?

Answer 50

The budget constrain line

Question 51

Where is the optimal choice point in the indifference curve?

Answer 51

Where the budget constrain is tangent to the indifference curve. The mix of good X and good Y that will be consumed given the consumer income and relative prices of the goods

Question 52

What does the curvature of the indifference curve show us?

Answer 52

The straighter the curve the better the substitute good, complementary goods will have more curvature

Question 53

Why do complementary goods have more curvy indifference curves?

Answer 53

Means the goods are complementary, so if you have a lot of good X and not many of good Y, you want want to readily substitute Y for X, however as the quantities even out you don't mind as much

Question 54

Define perfect substitutes.

Answer 54

A good that a consumer can trade for another good, in fixed units, and receive the same level of utility

Question 55

Define perfect complements

Answer 55

A good from which the consumer receives utility dependent on it being used in a fixed proportion with another good.

Question 56

What does the indifference curve look like for perfect substitutes?

Answer 56

Straight line with a negative slope

Question 57

What does the indifference curve look like for perfect complements?

Answer 57

L shaped

Question 58

How do we find the optimal choice point?

Answer 58

Set the gradient of the of the budget constraint line and the indifference curve equal

Question 59

What is the equation for finding the optimal choice point ?

Answer 59

MRS = MUx/MUy = Px/Py

Question 60

What does the indifference curve look like for two goods you don't like?

Answer 60

Concave curve