Chapter 3: Consumer Behavior Review

A collection of vocabulary flashcards based on review questions and exercises from Chapter 3 on Consumer Behavior.

Marginal Rate of Substitution (MRS)

The maximum amount of one good that a consumer is willing to give up in order to obtain one additional unit of another good while keeping satisfaction constant.

Convex Indifference Curve

An indifference curve where the marginal rate of substitution diminishes as a consumer moves down along the curve.

Perfect Substitutes

Two goods for which the marginal rate of substitution of one for the other is a constant, resulting in straight-line indifference curves.

Perfect Complements

Two goods for which the marginal rate of substitution is either zero or infinite, resulting in right-angled indifference curves.

Ordinal Utility

A utility function that ranks market baskets or consumer choices in order of preference from most to least preferred, without measuring by how much one is preferred to another.

Cardinal Utility

A utility function that assigns numerical values to utility levels, describing by how much one market basket is preferred to another.

Equal Marginal Principle

The principle stating that utility is maximized when a consumer equalizes the marginal utility per dollar of expenditure across all consumed goods, given by $\frac{MU_1}{P_1} = \frac{MU_2}{P_2}$.

Paasche Index

A cost-of-living index calculated using the current-period bundle of goods, which generally understates the ideal cost-of-living index.

Laspeyres Index

A cost-of-living index calculated using a fixed base-year bundle of goods to measure relative price changes over time.

Ideal Cost-of-Living Index

The cost of attaining a given level of utility at current prices relative to the cost of attaining that same level of utility at base-year prices.

Budget Line

A graph or line representing all combinations of goods that a consumer can purchase given their income and the current prices of the goods.