Part 3: Consumer behaviour

Quiz 6,Smartbook 7 and lecture slides

Utility is a _____-satisfying power

Want (satisfaction one gets from consuming it)

What is an IC

All combination of two goods that give the same level of satisfaction (utility)

When is MRS:

-1

-0

-Don’t have enough information

-When a consumer is willing to trade one unit of a good for exactly one unit of another good whilst maintaining the same utility

-Consumer is not willing ot give up any amount of good for another good

why are ICs convex

Consumers’ willingness to substitute one good for another will depend on the initial amounts of each that the consumer has

What is MRS

MRS is how much of one good you’re willing to give up to get more of another, while staying equally satisfied.

At the start, if you have lots of A but very little B, then B is

very valuable to you. You’ll give up a lot of A to get a little more B.

• As you gain more B and lose A, the extra value of B decreases and the extra value of A increases.

• This means

• you’re willing to give up less and less of A for each extra unit of B.

What causes the convex of an indifference curve (bowed inward)

The willingness to substitute diminishes as the mix of goods changes\

(Ie. Have lots of A and very little B,B valuable give up more A)

IC’S further away from the origin on a graph will reveal…

Higher total utility

Can two IC’s cross each other

NO

Total utility with different combinations of two commodities on one IC stays the same MEANING SIMPLY

Each curve = one utility level

• Curve A might represent 100 “utils” of satisfaction.

• Curve B might represent 120 “utils.”

• They cannot overlap because one bundle cannot simultaneously give both 100 and 120 utils.

(Also contradicts consistency)

Indifference curves cannot cross because each curve represents a distinct utility level, and a single bundle cannot belong to two different utility levels at once.

All combinations of products that fall ___ or ___ a budget line are attainable

on or inside

If a consumers budget line and IC are tangent what does that mean (2 things)

• MRS =Pb/Pa

• Consumers budget line and IC are tangent

• The slope of the indifference curve (MRS) = the slope of the budget line (price ratio).

• The consumer is balancing trade‑offs perfectly: the rate at which they’re willing to substitute one good for another equals the rate at which the market allows them to substitute (via prices).

• No other affordable bundle gives higher satisfaction.(EQUILIBRIUM)

What utility method des the Marginal-Utility theory use for measurement?

Cardinal

A straight-line budget constraint indicates a constant

Opportunity cost

Why do people still face choices, trade-offs and opportunity costs even though there’s an income increase

Because of Scarcity

What doesn't the IC theory require

It doesn’t require the consumer to specify how much (numerically) more/less satisfaction will be obtained form consuming a specific product but rather ranking combinations based on preference