Chapter 4-Individual Behavior

consumer

is an individual who purchases goods and services from firms for the purpose of consumption.

Consumer opportunities

represent the possible goods and services consumers can afford to consume

Consumer preferences

determine which of these goods will be consumed.

completeness, more is better, diminishing marginal rate of substitution, and transitivity.

The preference ordering is assumed to satisfy four basic properties:

Completeness

we assume the consumer is capable of expressing a preference for, or indifference among, all bundles.

For any two bundles—say, A and B—either A B,

B A, or A B.

More is better

If bundle A has at least as much of every good as bundle B and more of some good, bundle A is preferred to bundle B.

the consumer views the products under consideration as “goods” instead of “bads.”

True

more is better provides important information about consumer preferences, it does not help us determine a consumer’s preference for all possible bundle

Indifference curve

defines the combinations of goods X and Y that give the consumer the same level of satisfaction

The marginal rate of substitution (MRS)

is the absolute value of the slope of an indifference curve

The rate at which a consumer is willing to substitute one good for another good and still maintain the same level of satisfaction.

Diminishing Marginal Rate of Substitution

As a consumer obtains more of good X, the amount of good Y he or she is willing to give up to obtain another unit of good X decreases.

Transitivity

For any three bundles, A, B, and C, if A >B and B> C, then A >C. Similarly, if A= B and B= C, then A =C.

implies that indifference curves do not intersect one another.

It also eliminates the possibility that the consumer is caught in a perpetual cycle in which she or he never makes a choice.

budget constraint

restricts consumer behavior by forcing the consumer to select a bundle of goods that is affordable

budget set

The bundles of goods a consumer can afford.

budget line

The bundles of goods that exhaust a consumer’s income.

Market Rate of Substitution

The rate at which one good may be traded for another in the market; slope of the budget line.

• If a soda costs $2 and a bag of snacks costs $1...

• To buy 1 more soda, the market forces you to give up 2 bags of snacks.

• That 2:1 ratio is the market rate of substitution.

True

Under the assumption that prices remain unchanged, an increase in income will not affect the slope of the budget line; however, the vertical and horizontal intercepts both increase, causing the budget line to shift outward to the right in a parallel fashion (and conversely, inward toward the origin if income decreases).

The objective of the consumer

is to choose the consumption bundle that maximizes his or her utility, or satisfaction.

Consumer Equilibrium

The equilibrium consumption bundle is the affordable bundle that yields the greatest satisfaction to the consumer.

moment where what you want perfectly matches what you can afford

True

An important property of consumer equilibrium is that at the equilibrium con-

sumption bundle, the slope of the indifference curve is equal to the slope of the

budget line.

equilibrium choice

means you have successfully spent your budget in the smartest way possible.

Equilibrium

refers to the fact that the consumer has no incentive to change to a different affordable bundle once this point is reached

Substitution effect

The movement along a given indifference curve that results from a change in the relative prices of goods, holding real income constant.

economic way of saying: "When something gets more expensive, people swap it out for a cheaper alternative."

Income Effect

The movement from one indifference curve to another that results from the change in real income caused by a price change.

about how a price change makes you feel richer or poorer, altering how much stuff you can actually buy.

• Boba example, sudden decrease in price, more purchasing power cuz half the price lang binayadan, This newfound "boost" in your purchasing power is what economists call an increase in real income.

Buy one, get one free

The type of deal summarized above reduces only the price of the second unit pur-

chased

True

This analysis reveals two important benefits to a firm that sells gift certificates.

First, as a manager you can reduce the strain on your refund department by offering

gift certificates to customers looking for gifts. This is true for both normal and infe-

rior goods. Second, if you sell an inferior good, offering to sell gift certificates to

those looking for gifts may result in a greater quantity sold than if customers

resorted to giving cash gifts. (This assumes you do not permit individuals to redeem

gift certificates for cash.)

True

Most workers view both leisure and income as goods and substitute between

them at a diminishing rate along an indifference curve. Note that while workers enjoy leisure, they also

enjoy income.