Managerial Economics and Business Strategy - Chapter 4

This set of flashcards covers key concepts and theories from Chapter 4 of Managerial Economics and Business Strategy, focusing on individual behavior in consumption choices.

What is the income-leisure choice framework used for in managerial economics?

It illustrates the opportunities, incentives, and choices of workers and managers.

What do 'buy one, get one-free' deals illustrate in consumer behavior?

They impact a consumer's purchase decisions.

What are the four basic properties of a consumer’s preference ordering?

1) Completeness, 2) More is better, 3) Diminishing marginal rate of substitution, 4) Transitivity.

What does an indifference curve represent?

It defines the combinations of two goods that give a consumer the same level of satisfaction.

What is the budget constraint formula in consumer choice?

P1X + P2Y ≤ M.

What happens to consumer equilibrium when income increases?

It expands the consumer’s budget set.

What is the substitution effect?

The movement along a given indifference curve that results from a change in the relative prices of goods.

What distinguishes normal goods from inferior goods in consumer behavior?

Normal goods see increased consumption with income increases, while inferior goods see decreased consumption.

What is consumer equilibrium in the context of a consumption bundle?

It is a bundle that is affordable and yields the greatest satisfaction to the consumer.

How do price changes affect consumer behavior according to the notes?

Price increases reduce a consumer’s budget set while price decreases expand it.

How are substitutes defined in relation to price changes?

Goods are substitutes if an increase in the price of X leads to an increase in the consumption of Y.

What is the market rate of substitution?

It represents the slope of the budget line between goods X and Y.

How do indifference curves behave according to their properties?

They are ubiquitous, downward-sloping, cannot cross, and become less steep as one moves down and to the right.

What is the maximum amount of X that can be consumed if the budget constraint is 100 = 1X + 5Y?

Maximum X is 100 units.

What does the budget line indicate in consumer choice?

It defines all combinations of goods X and Y that exactly exhaust the consumer’s income.

What factors determine individuals' demand curves?

Indifference curves along with price changes.

How is market demand characterized in comparison to individual demand?

Market demand is the horizontal summation of individual demands.