ECN 212 ASU ASSIGNMENT Consumer Choice Theory
๐ฏ Core Concepts
1. What is the main goal of Consumer Choice Theory? A: To understand how consumers maximize utility given budget constraints.
2. What is utility in economics? A: The satisfaction or happiness a consumer derives from consuming goods and services.
3. What is total utility? A: The overall satisfaction received from consuming a certain quantity of goods.
4. What is marginal utility? A: The additional satisfaction from consuming one more unit of a good.
5. What does diminishing marginal utility mean? A: As consumption increases, the marginal utility of each additional unit decreases.
๐ฐ Budget Constraints
6. What is a budget constraint? A: A line showing all combinations of goods a consumer can afford with a given income.
7. What causes a budget line to shift? A: Changes in income or prices of goods.
8. What happens to the budget line if income increases? A: It shifts outward, allowing more consumption.
9. What happens if the price of one good decreases? A: The budget line pivots outward toward that good.
10. What is the slope of the budget line? A: The negative ratio of the prices of the two goods:
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โ๏ธ Utility Maximization
11. What is the utility-maximizing condition? A:
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12. What does the utility-maximizing rule imply? A: Consumers allocate spending so the last dollar spent on each good yields equal utility.
13. What happens if
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? A: The consumer should buy more of good X and less of good Y.
14. What is consumer equilibrium? A: The point where the utility-maximizing condition is met and the budget is fully spent.
15. Why is utility maximization important? A: It explains rational consumer behavior and demand patterns.
๐ Indifference Curves
16. What is an indifference curve? A: A graph showing combinations of goods that give the same utility.
17. Why are indifference curves downward sloping? A: Because more of one good requires less of another to maintain utility.
18. Why canโt indifference curves intersect? A: It would violate the assumption of consistent preferences.
19. What does a higher indifference curve represent? A: A higher level of utility.
20. What is the shape of typical indifference curves? A: Convex to the origin due to diminishing marginal rate of substitution.
๐ Marginal Rate of Substitution (MRS)
21. What is the marginal rate of substitution (MRS)? A: The rate at which a consumer is willing to trade one good for another while maintaining utility.
22. How is MRS calculated? A:
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23. What does a diminishing MRS imply? A: Consumers are less willing to substitute as they consume more of one good.
24. What does MRS equal at consumer equilibrium? A: The price ratio:
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25. What does a steep indifference curve imply? A: The consumer values the good on the horizontal axis more.
๐ Income and Substitution Effects
26. What is the substitution effect? A: Consumers switch to relatively cheaper goods when prices change.
27. What is the income effect? A: A price change affects purchasing power, altering consumption.
28. How do normal goods respond to the income effect? A: Consumption increases as income rises.
29. How do inferior goods respond to the income effect? A: Consumption decreases as income rises.
30. What is the total effect of a price change? A: The sum of substitution and income effects.
๐งฎ Mathematical Tools
31. What is the formula for a budget constraint? A:
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32. How do you graph a budget line? A: Plot intercepts:
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and
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, then connect.
33. What does the slope of an indifference curve represent? A: The MRS between two goods.
34. How do you find optimal consumption bundle? A: Where the budget line is tangent to the highest indifference curve.
35. What does tangency between budget line and indifference curve mean? A: Optimal consumption point.
๐ง Behavioral Assumptions
36. What assumptions underlie Consumer Choice Theory? A: Rationality, completeness, transitivity, and non-satiation.
37. What does completeness mean? A: Consumers can rank all bundles.
38. What does transitivity mean? A: If A > B and B > C, then A > C.
39. What does non-satiation mean? A: More is always preferred to less.
40. What does rationality imply? A: Consumers make consistent choices to maximize utility.
๐งช Applications & Extensions
41. How does Consumer Choice Theory explain demand curves? A: As price falls, substitution and income effects increase quantity demanded.
42. What is a Giffen good? A: A good where demand increases as price increases due to strong income effect.
43. What is a Veblen good? A: A good valued more when its price is higher due to status signaling.
44. How does Consumer Choice Theory apply to labor supply? A: Workers choose between leisure and labor to maximize utility.
45. What is revealed preference? A: Inferring preferences from observed choices.
๐งฉ Advanced Concepts
46. What is a corner solution? A: When a consumer consumes only one good due to preferences or prices.
47. What is a kinked indifference curve? A: Represents perfect complementsโgoods consumed in fixed proportions.
48. What are perfect substitutes? A: Goods with constant MRS; indifference curves are straight lines.
49. What is utility function notation? A:
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, where X and Y are goods.
50. How does Consumer Choice Theory relate to market demand? A: Aggregating individual choices forms the market demand curve.
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