Chapter 21 - The Theory of Consumer Choice

Budget constraint

Budget constraint

________: the limit on the consumption bundles a consumer can afford.

indifference curve

The ________ is tangent to the budget constraint at the optimum.

time allocation problem

The ________ is a trade- off between leisure and consumption.

Giffen

________ goods: a good that violates the law of demand.

Optimum

________: where the indifference curve and the budget constraint touches.

Relative Price

________: the price of one good compared to another.

demand curve

The ________ reflects consumption decisions.

Perfect complements

________: two goods with right- angle indifference curves 21- 3 Optimization: What a Consumer Chooses The Consumers Optimal Choices.

substitution effect

If the ________ of a higher interest rate is greater than the income effect, savings increase.

rotational shift

An expansion in consumer opportunities causes a(n) ________.

21 2 Preferences

________: What a Consumer Wants Representing Preferences with Indifference Curves.

marginal rate of substitution

The consumer chooses the quantities of the two goods so that the ________ equals the relative price.

Indifference curves

________ are bowed inward Two Extreme Examples of Indifference Curves.

consumers demand curve

A(n) ________ is a summary of the optimums and decisions they can make.

optimum

The ________ is the choice that will bring the most utility.

substitution effect

If the ________ of a higher interest rate is greater than the ________, savings decrease.