Consumer Behavior Chapter 4 Review

These flashcards cover key concepts from Chapter 4 of the Consumer Behavior lecture, focusing on consumer preferences, utility, budget constraints, and decision-making processes.

What do consumers optimize in their purchasing decisions according to consumer theory?

Consumers optimize their utility given scarce resources.

What are the four assumptions about consumer preferences?

1. Completeness and rankability 2. More is better (non-satiation) 3. Transitivity 4. Diminishing willingness to substitute.

What is utility?

Utility is a measure of how satisfied consumers are, representing happiness or well-being.

How is a utility function represented mathematically?

A utility function describes the relationship between consumption and well-being, taking various mathematical forms while conforming to preference assumptions.

What is marginal utility?

Marginal utility is the additional utility a consumer receives from an additional unit of a good or service.

In the utility function U = P^0.6 C^0.4, which item provides more utility for George, popcorn or a candy bar?

The first popcorn bag adds more utility than the first candy bar.

What does the term 'indifference curve' refer to?

An indifference curve plots all consumption bundles that provide the consumer with the same level of utility.

List two characteristics of indifference curves.

1. Curves further from the origin represent higher utility. 2. Curves never cross.

What does it mean when the slope of an indifference curve is referred to as the marginal rate of substitution?

It describes how much of one good a consumer is willing to give up for an additional unit of another good.

What is the budget constraint?

The budget constraint is a curve that describes all consumption bundles a consumer can purchase when spending all their income.

How does a change in income affect the budget constraint?

A change in income shifts the budget constraint by changing the intercepts.

What happens to the budget constraint if the price of one good increases?

It pivots the budget constraint by changing the slope.

What are corner solutions in consumer choice?

corner solutions occur when a consumer purchases only one of two goods, situated at the 'corner' of the budget constraint.

What is the tangency condition in consumer optimization?

The tangency condition occurs where the slope of the indifference curve equals the slope of the budget constraint.

What does it imply if the marginal utility per dollar of good X is greater than that of good Y?

The consumer should consume more of good X until the marginal utilities per dollar spent on both goods are equal.

What is the implication of having different consumer preferences on marginal rates of substitution?

Consumers will have the same MRS at their optimal bundles because they face the same price ratios.

What is a utility-maximizing bundle in economics?

A bundle that contains positive quantities of both goods, referred to as an interior solution.