ECON1101 Lecture Notes - Lecture 3: Giffen Good, Demand Curve, Inferior Good

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apricotelephant360

26 Oct 2018

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Utility: this denotes the satisfaction that an individual derives from consuming a given good or taking a certain action. It is measured in utils per unit of time. Decreasing marginal utility implies that the utility from consuming an extra unit of a given good decreases with the number of units that have previously been consumed. The substitution effect captures the change in quantity demanded of a given good following a change in its relative price. The demand curve represents the relationship between the price of a product and the quantity demanded of this product. Horizontal interpretation of a demand curve start from a certain price and find the associated quantity. Vertical interpretation of demand curve start from a certain quantity and find the associated price. Consumer reservation price (i. e. willingness to pay) denotes the maximum amount of money an individual is willing to pay for a certain good or service.

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1.	_____	The satisfaction or benefit that consumers receive from consuming goods or services.
2.	________________ _	A particular combination of specific quantities of goods or services
3.	________________ _	Consumers can rank all conceivable bundles of goods or services
4.	_____	If A is preferred to B, and B is preferred to C, then A is always preferred to C.
5.	_____	Equation showing a consumerâs perception of the total utility forthcoming from consuming each bundle of goods and services.
6.	_____	A set of consumption bundles each and every one of which provides a consumer with exactly the same level of total utility.
7.	_____	The number of units of Y that must be given up for total utility to remain the same when one more unit of X is consumed.
8.	_____	The addition to total utility attributable to consuming one more unit of a good, holding the consumption of all other goods constant.
9.	_____	The line showing all bundles of goods that can be purchased at given prices if the entire income is spent.
10.	_____	The change in the consumption of a good that would result if the consumer remained on the original indifference curve after the price of the good changes.
11.	_____	The change in consumption of goods results strictly from the change in purchasing power after the price of a good changes.
12.	________________ _	The sum of the substitution and income effects.
13.	_____	A good for which quantity demanded varies directly with price, causing an upward sloping demand curve.
14.	_____	A list of prices and the corresponding quantity consumers are willing and able to purchase at each price.

blushwildebeest943

1. If marginal utility is negative, total utility is

a. Positive

b. Negative

c. Decreasing

d. Constant

e. Increasing

2. If utility-maximizing consumers face identical prices, they will have identical

a. Marginal utilities for each good

b. Ratio of marginal utilities for each good

c. Preferences

d. Ratios of total utilities for each good

e. Total utilities for each good

3. The substitution effect

a. Always increases quantity demanded of a good whose relative price has fallen

b. Is opposite in sign to the income effect for all normal goods

c. Is opposite in sign to the income effect for all normal goods

d. May cause demand curves to be upward sloping

e. Is always dominated by the income effect for normal goods

4. Demand curves for normal goods slope downward because

a. The substitution effect of a price change is greater than the income effect

b. Substitution and income effects work in the same direction

c. The income effect is always greater than the substitution effect

d. The income effect is always less than the substitution effect

e. None of the above

5. The idea that a consumer derives less additional satisfaction from consuming successive units of a good is called

a. Diminishing consumer surplus

b. The paradox of value

c. Diminishing marginal utility

d. Diminishing total value of consumption

e. Diminishing total utility

indigolocust149

6. The consumerâs demand for good X is determined by the function X* (Px, M) = M / 10Px , where Px denotes the price per unit of good X. Consumerâs income is 1600 euros, the price per unit of good X is 5 euros. Suppose that the price per unit of good X decreases by 3 euros (thus, the new price per unit of good X is 2 euros).

a) Find the total change in the quantity of good X demanded by this consumer (which is caused by this price change)?

b) Find the substitution effect associated with this price change by applying the Slutsky approach.

c) Find the income effect associated with this price change by applying the Slutsky approach.

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ECON1101 Lecture Notes - Lecture 3: Giffen Good, Demand Curve, Inferior Good

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