EC120 Lecture Notes - Lecture 10: Budget Constraint, Indifference Curve, Substitute Good

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Ec120 lecture #10: the theory of consumer choice. P 2 if income increases, the budget constraint will shift outwards (parallel shift) if price falls. Pepsi per pizza at point b, there is too much pizza and a little pepsi consumer requires only a little extra pepsi to give up one pizza the mrs is. The consumer"s optimal choice the consumer would like to end up with the best possible combination of the two goods (highest indifference curve) but the consumer must also end up on or below his budget constraint. How changes in income affect the consumer"s choices increase in income budget constraint shifts outward normal good inferior good suppose that the. to per liter price of pepsi falls from. Income and substitution effects the impact of a change in the price of a good on consumption can be decomposed into two effects: Now that pepsi is cheaper, my income has greater purchasing power.

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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.

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1. Economists use indifference curves to characterize the preferences of a rational consumer. There are some plausible assumptions that lead to a set of âwell-behavedâ (i.e., downward-sloping and strictly convex) indifference curves. Which one of the following is NOT among the assumptions?

a. All goods must be economic âgoods.â

b. Preferences are complete.

c. Preferences are transitive.

d. All goods are normal goods

2. Given the prices of good X and Y, the (negative of the) slope of the budget constraint (i.e., - PX/PY) measures

a. the amount of good Y the consumer is willing to forgo in order to consume one more unit of good X.

b. the ratio of the consumer's income to the price of the X good.

c. the quantity of the Y good that must be forgone in order to purchase one more unit of the X good.

d. the quantity of the X good that must be forgone in order to purchase one more unit of the Y good.

3. Which of the following statements is incorrect for an inferior good?

a. An inferior good may have an upward-sloping demand curve.

b. The income elasticity of demand for an inferior good is negative.

c. An inferior good is an economic âbad.â

d. All of the above.

1.The Phillie Phanatic always eats his ballpark frank in a special way; he uses a foot-long hot dog together with precisely half a bun, 1 ounce of mustard, and 2 ounces of pickle relish. He only gains utility/satisfaction from these 4 items, any extra of a single item without the others is worthless.

What can we say about the relationship among these goods for the Phillie Phanatic and the shape of his indifference curve with respect to these goods?

2. Consider a person with convex indifference curves. When she optimally chooses a consumption bundle of a particular amount of fruit on the Y-axis, and vegetables on the X-axis, her marginal rate of substitution equals:

A. 1

B. PV_/PF (The price of vegetables divided by the price of fruit)

C. P_F/P_V (The price of fruit divided by the price of vegetables)

D. 0

3. A consumer has a budget for food (F) and shelter (S). With income M, and prices PF and PS, the budget constraint for this consumer may be represented as:

A. PSS + PFF = M

B. F = M/PF - (PS/PF)S

C. S = M/PS - (PF/PS)F

D. All of the above

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EC120 Lecture Notes - Lecture 10: Budget Constraint, Indifference Curve, Substitute Good

EC120 Full Course Notes

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