Intro to Microeconomics Chapter 9 (Indifference Curves)

what does the indifference curve look like when the two goods are perfect substitutes?

down-ward sloping straight line constant MRS

what is behavioral economics?

economics that does not assume that all consumers are rational economics + psychology

what is the income effect for an inferior good?

negative

are movies and soda substitutes?

not CLOSE substitutes, but yes the more money I spend on soda, the less I spend on movies

the higher the price of the good on the x-axis, the (...) the budget line

steeper

what is the marginal rate of substitution?

the MRS the rate at which a person will give up the good on the y-axis to get an additional unit of the good on the x-axis while remaining on the same indifference curve or, the absolute value of the slope of the indifference curve at a certain point (slope of the tangent line)

what is the relationship between two goods that have a more tightly curved indifference curve?

they are poor substitutes

what is framing?

when our answer depends on the way a question is phrased irrational; if we were rational, our answer would always be the same

what is status quo bias?

when we choose the default option even though there may be a better option irrational

what is anchoring?

when we have the choice between options and one options is irrelevant but it still affects our decision making irrational

what is a consumer's optimal consumption point?

where MRS = P(good 2)/P(good 1)

how do I find the budget line equation?

(P of good 1)(Q of good 1) + (P of good 2)(Q of good 2) = income P₁Q₁ + P₂Q₂ = I ^sometimes income is labelled Y flip it to y = mx + b form: Q₁ = I/P₁ - (P₂/P₁)Q₂

what is the substitution effect when the price of one good (let's say food) decreases?

I buy more food and less clothing (the good on the other axis)

what does the indifference curve look like when the two goods are perfect complements?

L-shaped because having two right shoes is no better if I only have one left shoe

do indifference curves ever intersect?

NEVER

what do I label an indifference curve?

U for utility

what is the principle of diminishing MRS?

a general tendency for a person to be willing to give up less of the good on the y-axis to get one more unit of the good on the x-axis while at the same time remaining indifferent as the quantity of the x good increases

what is a giffen good?

a good that results in an upward sloping demand, meaning that we buy more as price increases good must be inferior and account for a huge portion of our income

what is the indifference curve?

a line that shows combinations of goods among which a consumer is indifferent separates "preferred" and "not preferred" areas on a preference map every point along the curve is equally preferred (has equal utility)

where is Lisa's best affordable choice of movies and soda?

a point on her highest attainable indifference curve where she spends all of her income on movies and soda (meaning it's on the budget line) where the slope of the budget line equals the slope of the highest attainable indifference curve (AKA relative price = MRS)

why aren't indifference curves usually straight?

because the more of one good I have, the more I am willing to give up for one more unit of the other good

the lower the price of the good on the x-axis, the (...) the budget line

flatter

what are divisible goods?

goods like gasoline and electricity that can be bought in any quantity desired think of all goods as divisible for now

how many indifference curves are there?

hundreds representing different levels of satisfaction northeast is better unless we are talking about a bad good like pollution

what if a good is inferior, its price decreases, and my income increases?

if the negative income effect equals the positive substitution effect, a fall in price leaves the quantity bought the same if the negative income effect is smaller than the positive substitution effect, a fall in price increases the quantity bought and the demand curve slopes downward if the negative income effect is greater than the positive substitution effect, a fall in price decreases the quantity bought and the demand curve slopes upward

what are the slope of the indifference curve and the slope of the budget line?

indifference curve: MRS = ∆Q(good 1) / ∆Q(good 2) budget line: Price(good 2) / Price(good 1)

what does consumer overconfidence lead to?

irrationality

what happens to the budget line when income increases?

it shifts outward, but its slope remains the same

what is a household's real income?

its income expressed as a quantity of goods that the household can afford to buy income / price = quantity Y / P₁ = Q₁ for good 1

what's the deal with multiple indifference curves?

points along an indifference curve are always more preferred than points along an indifference curve to the left of it

what are the three categories of attainable combinations of goods?

preferred, not preferred, and indifferent

what is the income effect if the price of a good decreases?

real income increases IF it is a normal good if it is an inferior good, ?????????

what is the effect of the principle of diminishing MRS on the graph of an indifference curve?

the curve is bowed toward the origin if the two goods are not perfect substitutes or perfect complements

what is the income effect?

the effect of a change in income on buying plans shifting of the budget line as well as the demand curve

what is the substitution effect?

the effect of a change in price on the quantity bought when the consumer remains indifferent between the original situation and the new situation it is relative to the other good (?)

what is the price effect?

the effect of a change in the price of a good on the quantity of the good consumed

how do I draw a new budget line with a new price for one of the goods?

the intercept for the unchanged good is the same, but to get the intercept for the good with the new price, you divide income by the new price

where do I want to be on my budget line?

the point on my budget line that is tangent to the highest possible indifference curve

what is a relative price?

the price of one good divided by the price of another AKA the opportunity cost of the good in the numerator AKA the slope of the budget line