THEORY OF CONSUMER CHOICE
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9 Terms
Def of budget constraint?
The limit on the consumption bundles that a consumer can
afford.
Def of indifference curve?
A curve that shows consumption bundles that give the consumer the same level of satisfaction.
Def of marginal rate of substitution?
the rate at which a consumer is willing to trade one good for another.
Def of perfect substitutes?
Two goods with straight-line indifference curves.
Perfect complements meaning?
Two goods with right- angle indifference curves.
Def of income effect?
The change in consumption that results when a price change moves the consumer to a higher or lower indifference curve.
Substitution effect meaning?
The change in consumption that results when a price change moves the consumer along a given indifference curve to a point with a new marginal rate of substitution.
Optimum meaning?
The point on the budget constraint that touches the highest possible indifference curves.
4 properties of indifference curves
-Downward sloping
-Higher indif curves are preferred
-bowed inwards
-cannot cross