Micro Midterm 2 Consumers and Incentives

why are consumers price takers

individual transactions are too small to have much impact on the market price

for a consumer with a given level of income, the combinations of goods for the budget constraint will be _____ than of the budget set

lower

incentive to change your behavior goes away when

two ratios are equal

which is better, cash or in kind transfer

usually cash, or equally well of with in kind, never better off with in kind

the buyers problem: preferences

we all want the biggest bang for our buck, what we actually buy reflects our tastes and preferences

why does the demand curve have a negative slope

when the price is lower, people will want to buy more

how does a consumer's budget set differ from his budget constraint

a budget set refers to all of the possible bundles of goods and services a consumer can purchase, while a budget constraint is limited to the bundles he can purchase using all of his income

what are necessary ingredients to the buyers problem

amount of money the consumer has to spend, consumer's tastes and preferences, prices of goods and services

the amount of apples and bread that a consume could choose using his or her entire budget is

budget constraint

combinations of apples and laces of bread that a consumer could purchase would represent

budget set

three areas defined by budget constraint

bundles on the line, bundles inside the line, bundles outside the constraint

your parents will give you either a check for $80, or two sweaters. which is cash and which is in kind

check is cash, sweaters are in kind

cash transfer

direct transfer payments of money to eligible people, provided by state and federal government

a consumer's budget constraint refers to the collection of all possible bundles that

exactly exhaust a consumer's entire budget

a decrease in a consumer's income causes her budget constraint to encompass _______ bundles

fewer

for economists, the buyer's problem refers to

how consumers arrive at a choice as to what to purchase

a price increase causes what on a budget constraint

inward pivot

a decrease in income causes what on a budget constraint

inward shift

a price decrease causes what on a budget constraint

outward pivot

an increase in income causes what on a budget constraint

outward shift

what makes up the buyer's problem

preferences, cost (prices), income/wealth

the buyers problem: cost

prices are fixed (no negotiation), we can buy as much as we want of something without driving the price up (because of an increase in demand)

budget constraint line

shows relationship between quantities of two goods

if an individual consumes goods X and Y and is currently maximizing her total benefits

the marginal benefits per dollar spent are the same for both goods, the equal bang for buck rule is adhered to, no other consumption choice can make total benefits greater, MBx/Px = MBy/Py

a consumer's satisfaction is maximized when the marginal benefit from the last dollar she spent on one good is equal to the marginal benefit from the last dollar she spent on another good because

the reality of diminishing marginal benefits assures that any shift in consumption toward either good must necessarily maker her worse off

equilibrium means

there is no incentive to change your behavior

the buyers problem: income/wealth

there is no saving or borrowing, only buying, even though we use a straight line to represent purchase choices, we only purchase whole units

in kind transfer

you transfer your specific investments over to the new company without selling and buying