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Consumer Choice
Quiz 4
19
Economics
Undergraduate 4
02/19/2013

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Cards

Term
What is a budget line?
Definition
Maximum combination of 2 goods a consumer can buy, given thier income and price of the 2 goods
Term
What is a shift in the budget line?
Definition

Changes in INCOME will SHIFT the budget line.

(Increase RIGHT; Decrease LEFT)

Term
What causes a PIVOT in budget line?
Definition

Changes in PRICE will pivot budget line.

(INCREASE Px = LEFT; DECREASE Px = RIGHT)

Term
What is indifference curve properties?
Definition

 

  1. Every possible combination of goods is on an indifference curve
  2. Indifference curves are negatively sloped (you must give up one to gain the other)
  3. Indifference curves further from origin represent higher levels of total satisfaction (always prefer more to less)
  4. Indifference curves never intersect
  5. Indifference curves are convex (bowed into origin)
  6. Slope of indifference curve = -MUx/MUy

 

Term
What is the eqi-marginal principle?
Definition
the last dollar spent on each good must yield the same gain in satisfaction as the last dollar spent on any other good
Term
What are the good defintions for INCOME (Ey)?
Definition

>0 NORMAL good

<0 INFERIOR good

+>1 SUPERIOR good

Term
What is UTILITY satisfaction?
Definition

derived when consuming the same thing

(only order/ can't compare with people)

Term
What is MARGINAL?
Definition
what happens when you take the next step
Term
What is MARGINAL UTILITY?
Definition
gain satisfaction as you consume the next unit
Term
When TOTAL UTILITY(TU) is MAX = ____?
Definition
Marginal Utility (MU) = 0
Term
How many combinations of  of 2 goods are on a I.C?
Definition
ALL combos
Term
At every point on a I.C., the level of _____ is the _____?
Definition
At every point on a I.C., the level of SATISFACTION is the SAME.
Term
I.C. have a ____ slope, must ___ 1 good to ____ another?
Definition
I.C. have a NEGATIVE slope, must LOSE 1 good to GAIN another?
Term
What is the slope of a I.C.?
Definition
MUx/MUy
Term
I.C. never ____?
Definition
Intersects
Term
I.C. curves ____ from the ____ represent ____ levels of _____ satisfaction?
Definition
I.C. curves FURTHER from the ORIGIN represent HIGHER levels of TOTAL satisfaction?
Term
I.C. curves are ____ ?
Definition
CONVEX
Term
Law of diminishing marginal utility
Definition
the gain in satisfaction associated with consuming equal successive units of a good will eventually decline as the amount consumed increases
Term
Steps to figure Consumer Equilibrium
Definition
  1. Graph budget line
     
  2. Graph indifference curve
     
  3. Find where slope of budget line = slope of indifference curve (-Px/Py=-MUx/MUy)
     
  4. Cross multiply and see you are applying the equi-marginal principle…MUx/Px=MUy/Py
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