Theory of Consumer Behavior - McGraw Hill Chapter 5
As price of a good increases,
quantity of the good demanded decreases
The rate at which a consumer is able to substitute one good for another is determined by the ...
ratio of the prices of the goods.
The rate at which a consumer is willing to substitute one good for another is measured by ...
slope of the line tangent to the indifference curve.
Consumer theory requires...
that consumers be able to rank/order various combinations of good and services according to level of satisfaction with each combo.
The optimal level of pollution is that level at which ...
the total benefit of pollution reduction exceeds the total cost of pollution reduction by the greatest amount.
Transitive Preference Ordering
IF A>B and B>C, then A>C
Shifting Budget Line
If income (M) or the price ratio (Px/Py) changes, the budget line will shift.
Consumer's Optimization Problem
Individuals make consumption decisions with the goal of maximizing their total satisfaction from consuming various good and services, subject to the constraint that their spending on goods exactly equals income.
Budget Line
Line showing all bundles of goods that can be purchased at given prices if the entire income is spent.
Market Demand
List of prices and the quantities consumers willing and able to purchase at each price on list
Slope of Indifference Curve
MRS -dY/dX Tangent of point on curve
Utility Maximized
MUx/Px = MUy/Py
Maximizing Utility with Budget
Marginal utility of X per dollar = Marginal utility of Y per dollar; MUx/Px = MUy/Py
Individual Consumer Demand Curve
Max utility when budget line is tangent to indifference curve
Marginal Rate of Substitution (MRS)
Measure of units of Y that must be given up per unit of X added to maintain constant utility
Nonsatiation
More is preferred to less
Consumption Bundles
Particular combinations of specific goods or services
Indifference Maps
Plot of more than one indifference curve (that do not intersect)
MRS equals
- MUx/MUy
Slope of the Budget Line
1) -Px/Py 2)How much good Y must be given up to afford good X 3) is negative
Intercept of Vertical Axis of Demand Curve
1) Maximum price consumers will pay 2) Marginal benefit (value) individuals place on last unit consumed
True of Utility
1) Not easily measured 2) U= f(X,Y) 3) Measured in utility units
Caveats of Consumer Optimization
1) Spending = Income. No savings/borrowing 2) Completely informed - aware of all options
Which assumption is NOT made in consumer behavior? 1) Consumers can rank all bundles of goods 2) Consumers have complete information 3) Consumers can measure the utility they get from all bundles of goods 4) None of the above
3) Consumers can measure the utility they get from all bundles of goods
Marginal Utility (MU)
Addition to total utility attributed to the one additional unit of a good at current rate of consumption (All other goods constant) dU/dX
Horizontal Summation
Aggregating individual demand curves to determine market demand curve
MRS is 1/2
At point B, marginal rate of substitution is...
Shape of Indifference Curves
Downward sloping because gain X requires less Y. Convex - The consumer is willing to accept a smaller decrease in Y for each X
Utility
Benefits consumers obtain from the goods and services they consume.
Complete Preference Ordering
Consumers are able to rank all conceivable bundles of commodities.
The MRS increases/decreases along the indifference curve
Decreases or diminishes
Utility Function
Equation that shows an individual's perception of level of utility derived from consuming each conceivable bundle. U = f(X,Y)
Indifference Curve
Set of points representing different bundles of goods and services, each of which yields the same level of total utility.
Corner Solutions
Utility max bundle lies at one endpoint of budget line. Consumer chooses not to consume other good.
Along an indifference curve
consumer utility is constant.
A decrease in price of Y ...
increases ability to buy good Y, rotating budget line out on the Y axis
Given NB at 100 of activity = $20, ...
increasing activity by one unit will increase by $20.
Market demand curve...
is the sum over prices of all individual consumers' quantities demanded
Marginal Utility (MU)
the change in total utility that results from increasing the amount of a good consumed by one unit.
A firm will maximize profit by producing that level of output at which ...
total revenue exceeds total cost by the largest amount.