Micro-Economics: Study Questions #5

What are the five characteristics of perfect competition according to Mansfield?

1. Infinity of infinitesimally small buyers and sellers
If it is infinitely small it would have no effect on the price
2. Price-taking behavior
3. Homogeneous competition
Every firm produces the exact same product in a particular industry, you can't tell where it came from by looking at it
4. Perfect mobility of capital and labor into and out of every industry
No barriers to capital and labor moving in and out of industries
5. Perfect knowledge of the past present and future

Define utility.

the amount of satisfaction a consumer gets from a particular market basket

How do economic agents get utility?

the difference between two market baskets, by consuming commodities

Define marginal utility

marginal utility is the additional utility is the utility that comes form consuming one more unit of good holding all other consumption of goods constant

Define total utility

the total amount of satisfaction that comes from consuming goods, sum of marginal utilities

Law of diminishing marginal utility

as a person consumes more and more of a given commodity (the consumption of all other commodities held constant) the marginal utility of the commodity eventually will tend to decline

What does it mean for an economic agent to be rational?

Will choose a market basket for which the marginal utility of the last dollar spent on all commodities purchased is the same where the consumer receives the greatest total utility possible

Define cardinal utility

The difference between 2 measurements is itself numerically significant

Define ordinal utility

a consumer can only rank market baskets w/ regard to how much satisfaction they give him or her

What is the budget allocation rule (BAR)?

If the law of diminished utility holds true, the consumer, if he/she maximizes utility, will allocate his/her expenditure among commodities so that for every commodity purchased, the marginal utility of the commodity is proportional to its price.

Analyze the budget line

Shows all the combinations of quantities of good x and good y that the consumer can buy