# Shared Flashcard Set

## Details

consumer economics test 2
na
88
Economics
03/17/2013

Term
 demand function
Definition
 gives the optimal amounts of each of the goods as a function of the prices and income faced by the consumer.
Term
 x1=x1(p1,p2,m) x2=x2(p1,p2,m) left side: quantity demanded right side: the function that relates the prices and income to that quantity.
Definition
 How to write the demand function whats left side stand for? right side?
Term
 comparative statistics
Definition
 studying how a choice responds to changes in the economic enviornment
Term
 shifts it outward in a parallel fashion
Definition
 how an increase in money income affects the budget line when prices are fixed
Term
 normal goods
Definition
 demand for these goods increases when income increases, and decreases when income decreases.    Quantity demanded always changes in the same way as income changes
Term
 (Δx1/ Δm)>0.
Definition
 normal goods equation  (showing that quantity demanded always changes in the same way as income changes)
Term
 inferior good
Definition
 this is a good where an increase of income results in a reduction in the consumption of one of the goods.
Term
 level of income
Definition
 whether a good is inferior or not depends on the _ that we are examining
Term
 income offer curve
Definition
 connects demanded bundles as we shift the budget line outward -illustrates the bundles of goods that are demanded at the different levels of income
Term
 have a positive slope
Definition
 if both goods are normal goods, then the income expansion path (income offer curve) will  _
Term
 Engel curve
Definition
 if we hold the prices of goods 1 and 2 fixed and look at how demand changes as we change income, this curve is generated.    (a graph of the demand for one of the goods as a function of income, with all prices being held constant)
Term
 increase consumption of good 1
Definition
 if p1 < p2, so that the consumer is specializing in consuming good 1, then if his income icnreases he will _
Term
 x1=am/p1
Definition
 if u(x1,x2) =( x^a/1)(x^1/2-a), the Cobb-Douglas demand for good 1 has the form _
Term
 double demand
Definition
 For a fixed value of p1, this is a linear funciton of m. Thus doubling m will _
Term
 Straight lines through the origin
Definition
 The fact that the demand functions for both goods are linear functions of income means that the income expansion paths will be_
Term
 luxury good
Definition
 if the demand for a good goes up by a greater proportion than income, it is called a _
Term
 necessary good
Definition
 if demand for the good goes up by a lesser proportion than income we say it is a _
Term
 homothetic preferences
Definition
 perfect substitutes, complements, and Cobb-Douglas are all this
Term
 homothetic preferences
Definition
 when income is scaled up or down by any amount t > 0, the demanded bundle scales up or down by the same amount.
Term
 t times as much income and the same prices
Definition
 If the indifference curve is tangent to the budget line at (x*1,x*2), then the indifference curve through (tx*1,tx*2) is tangent to the budget line that has _
Term
 quasilinear preferences
Definition
 the case where all indifference curves are "shifted" versions of one indifference curve.
Term
 "zero income effect"
Definition
 if preferences are quasilinear, we sometimes say that there is a _ for good 1.
Term
 the quantity demanded of good 1 should increase when its price decreases
Definition
 suppose that we decrease the price of good 1 and hold the price of good 2 and money income fixed. Then what can happen to the quantity demanded of good 1?
Term
 budget line becomes flatter
Definition
 when the price of good 1 decreases, the budget line _
Term
 Giffen good
Definition
 well-behaved preferences for which a decrease in the price of a good 1 leads to a reduction in the demand for good 1.
Term
Definition
 Even though money income remains constant, a change in the price of a good will change _, and thereby change demand
Term
 price offer curve
Definition
 this curve represents the bundles that would be demanded at different prices for good 1.
Term
 demand curve
Definition
 a plod of the demand function, x1 (p1,p2,m), holding p2 and m fixed at some predetermined values
Term
 opposite negative
Definition
 ordinarily, when the price of a good increases, the demand for that good will decrease. Thus the price and quantity of a good will move in _ direction, which means the demand curve will typically have a _ slope.
Term
 zero one
Definition
 if P1 is very high then the consumer will strictly prefer to consume _ units; if p1 is low enough the consumer will strictly prefer to consume _ unit.
Term
 reservation price
Definition
 the price at which the consumer is just indifferent to consuming or not consuming the good
Term
 reservation price
Definition
 measures the increment in utility necessary to induce the consumer to choose an additional unit of the good.
Term
 substitute
Definition
 if the demand for good 1 goes up when the price of good 2 goes up, then we say that good 1 is a _ for good 2.
Term
 complement
Definition
 if the demand for good 1 goes down when the price of good 2 goes up, we say that good 2 is a _ to good 2.
Term
 gross substitutes/ complements
Definition
 If good 1 can be used to substitute for good 3, but good 3 may be a complement for good 1.
Term
 the inverse demand function
Definition
 is the demand function viewing price as a functin of quantity.  measures teh same relationship as the direct demand function, just from another point of view.
Term
 MRS
Definition
 measuring the marginal willingness to pay.
Term
 revealed preferences
Definition
 a relation that holds between the bundle that is actually demanded at some budget and the bundles that could have been demanded at that budget.
Term
 The principle of revealed preference
Definition
 let (x1,x2) be the chosen bundle when prices are (p1,p2), and let (y1,y2) be some other bundle such that p1x1+p2x2 is greater than or equal to p1y1 + p2y2. Then if the consumer is choosing the most preferred bundle she can afford, we must have (x1,x2) > (y1,y2)
Term
 (x1,x2) > (y1,y2) and that (y1, y2) > (z1,z2) (x1,x2)> (z1,z2)
Definition
 Suppose that we happen to know that (y1,y2) is a demanded bundle at prices (q1,q2) and that (y1,y2) is itself revealed preferred to some other bundle (z1,z2) that is: q1ys+q2y2 is greater than or equal to q1z1+q2z2. Then we know:    From the transitivity assumption we can conclude that:
Term
 Indirectly revealed preferred
Definition
 if bundle A is directly revealed preferred to B, and B to C, C to D... all the way to M, then bundle A is still _ to M.
Term
 revealed preferred
Definition
 if a bundle is either directly or indirectly revealed preferred to another bundle, we will say that teh first budnel is _ to the second.
Term
 Weak Axiom of Revealed Preferences WARP
Definition
 If (x1,x2) is directly revealed preferred to (y1,y2), and the two bundles are not the same, then it cannot happen that (y1,y2) is directly revealed preferred to (x1,x2).    (if the y-bundle is affordable when the x-bundle is purchased, then when the y-bundle is purchased, the x-bundle must not be affordable.
Term
 Violated warp
Definition
 This consumer's behavior could not have been maximizing behavior
Term
 directly  directly
Definition
 WARP requires that if X is _ revealed preferred to Y, then we should never observe Y being _ revealed preferred to X.
Term
 Strong Axiom Revealed Preference SARP
Definition
 If (x1,x2) is revealed preferred to (y1,y2), either directly or indirectly, and (y1,y2) is different from (x1,x2), then (y1,y2) cannot be directly or indirectly revealed preferred to (x1,x2).
Term
 transitive
Definition
 Since the underlying preferences of the consumer must be transitive, it follows that the revealed preferences of the consumer must be _
Term
 SARP
Definition
 if a consumer is always choosing the best things that he can afford, then his observed behavior must satisfy _
Term
 substitution effect
Definition
 the change in demand due to the change in the rate of exchange betweent the two goods
Term
 income effect
Definition
 the change in demand due to having more purchasing power
Term
 "pivot-shift"
Definition
 this _ operation gives us a convenient way to decompose the change in demand into two pieces.
Term
 the pivot
Definition
 is a movement where teh slope of the budget line changes while its purchasing power stays constant
Term
 shift
Definition
 a movement where the slope stays constant and the purchasing power changes.
Term
 compensated deamand
Definition
 the idea is that teh consumer is being compensated for a prices rise by having enough income given back to him to purchase his old bundle
Term
 The law of demand
Definition
 if the demand for a good increases when income increases, then the demand for that good must decrease when its price increases
Term
 slutsky substitution effect
Definition
 Change in deamnd when prices change but a consumer's purchasing power is held constant, so that the original bundle remains affordable.
Term
 comparative statistics analysis of ordinary demand functions
Definition
 the study of how ordinary demands x1*(p1,p2,m) and x2*(p1,p2,m) change as prices p1,p2 and income (m) change
Term
 the p1- price offer curve
Definition
 the curve containing all the utility maximizing bundles traced out as p1 changes, with p2 and m constant is _
Term
 ordinary demand curve for commodity 1
Definition
 the plot of the x1-coordiante of the p1-price offer curve against p1 is the _
Term
 x1' units
Definition
 given p1', what quantity is demanded of commodity 1?
Term
 inverse demand function of a commodity
Definition
 taking quantity demanded as given and then asking what must be the price describes the _
Term
 Engel curve
Definition
 a plot of quantity demanded against income
Term
 homothetic
Definition
 Engel curves are straight lines if the consumer's preferences are _
Term
 posititvely
Definition
 A normal good's Engel curve is _ sloped
Term
 negatively
Definition
 An income inferior good's Engel Curve is _ sloped
Term
 ordinary
Definition
 a good is always called _ if the quantity demanded of it always increases as its own price decreases
Term
 Giffen good
Definition
 if, for some values of its own price, the quantity demanded of a good rises as its own price increaeses then it is called _
Term
 gross substitute
Definition
 If an increase in p2 increases demand for commodity 1 then commodity 1 is a _ for commodity 2.
Term
 gross complement
Definition
 if an increase in p2 reduces demand for commodity 1 then commodity 1 is a _ for commodity 2
Term
Definition
 -do not change while the choice data are gathered -are strictly convex -are monotonic
Term
 x* is revealed directly as preferred to y
Definition
 Suppose that bundle x* is chosen when the bundle y is affordable. Then x* is _ otherwise y wouldve been chosen
Term
 x is revealed indirectly as preferred to z.
Definition
 Suppose x is revealed directly preferred to y, and y is revealed directly preferred to z. Then, by transitivety, _
Term
 Warp sarp
Definition
 To apply revealed preference analysis, choices must satisfy two criteria -
Term
 never the case that y is revealed directly as preferred to x
Definition
 if the bundle x is revealed directly as preferred to the bundle y then it is _
Term
 then it is never the case that y is revealed (directly or indirectly) as preferred to x
Definition
 if the bundle x is revealed (directly or indirectly) as preferred to the bundle y and x doesn't equal y, then _
Term
 quantity index
Definition
 a price-weighted average of quantities demanded
Term
 price index
Definition
 a quantity-weighted average of prices
Term
 indexation
Definition
 changes in price indices are sometimes used to adjust wage rates or transfer payments. this is called _
Term
 Full indexation
Definition
 occurs when the wages or payments are increased at the same rate as the price index being used to measure the aggregate inflation rate.
Term
 substitution effect
Definition
 happens when the commodity is relatively cheaper so the consumer goes for relatively more expensive other commodities
Term
 income effect
Definition
 happens when the consumer's budget of \$m can purcahse more than before
Term
 of the price change
Definition
 changes to quantities demanded due to this 'extra' income are the income effect of the _
Term
 pure substitution effect and an income effect
Definition
 slutsky discovered that changes to demand from a price change are always the sum of a _
Term
 increased
Definition
 if, at the new prices, less income is needed to buy the original bundle then "real income" is _
Term
 decreased
Definition
 if, at the new prices, more income is needed to buy the original bundle then "real income " is _
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