Microeconomics Chapter 6
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- What is the general for of the equation for the Budget Constraint?
- PxX + PyY = I (Px is price of X X is quantity of X consumed I is the Income)
- Use the general for of the equation to Solve for Y
- "Check slide 18 of 40)
- What is the slope of the Budget Constraint called?
- The Marginal rate of Transformation
- What does the Marginal Rate of Transformation tell us about the budget constraint?
- It tells us how much Y the consumer must give up to get more X.
- An increase in income shifts the budget line _ .
- Outward
- A _ in the price of a good causes a change in the slop of the budget line and it rotates outward
- decrease
- What is the satisfaction, or reward, a product yields relative to its alternatives. It is the basis of choice
- Utility
- What is the additional satisfaction gained by the consumption or use of one more unit of something?
- Marginal Utility
- What is the more of any one good consumed in a given period, the less satisfaction generated by consuming each additional unit of the same good
- Law of diminishing marginal utility
- What does the graph of Total Utility look like?
- Refer to slide 26 of 40
- What does the graph of marginal utility look like?
- refer to slide 26 of 40
- What are the limits imposed on household choices by income, wealth, and product prices?
- Budget constraint
- The set of options that is defined and limited by a budget constraint
- Choice set/opportunity set
- What are indications of how a consumer would rank any two possible bundles, assuming the bundles were available to the consumer at no cost
- Consumer preferences
- What is a combination of goods and services that an individual might consume
- Bundle
- Consumer preferences: What assumption of consumer preferences states that a consumer is able to rank any two distinct bundles?
- completeness
- Consumer Preference: What assumption about consumer preference states that the consumer makes consistent choices?
- transitive
- Consumer Preferences: What assumption about consumer preferences says that more is better, given no cost?
- nonsatiation
- What is a set of points, each point representing a combination of goods X and Y, all of which yield the same total utility?
- an Indifference Curve
- What is the complete set of indifference curves that summarize a consumer's tastes?
- an Indifference map
- Properties of Indifference curves: Why are bundles on indifference curves farther from the origin preferred to those on indifference curves closer to the origin?
- Because indifference curves farther from the origin, we are giving the consumer more of a good without actually taking away any of the other product
- Properties of indifference curves: Indifference curves must always slope _
- Downward
- As we move along an indifference curve, total utility always _
- stays the same.
- What ratio constitutes the slope of an indifference curve?
- The ratio of the marginal utility of X and Y
- What is the slope of an indifference curve called?
- The Marginal Rate of Substitution.
- a _ is a feature of consumer preferences for which the marginal rate of substitution of one good for another good diminishes as the consumption of the first good increases along an indifference curve
- diminishing marginal rate of substitution.
- What is the utility-maximizing rule?
- see slide 48 of 40
- What phenomenon occurs when prices of goods leads to an increase in the "real income" of the household?
- The Income Effect
- What describes how when the price of a good falls, it becomes cheaper relative to other goods?
- The Substitution Effect
- In terms of leisure, what can the wage rate be thought of?
- The price of leisure, because for each hour that you don't work, you are giving up an hour's worth of wages.
- This is a diagram that shows the quantity of labor supplied at different wage rates.
- The labor supply curve
- What does the shape of the Labor supply curve depend on?
- how households react to changes in the wage rate.
- If wages go up, what is likely to happen?
- You spend more time at work. Leisure has become more expensive
- When a household borrows money, what is it really doing?
- It is borrowing money from its future income, which is theoretically believed to cover the costs
- When a household saves money, what are they really doing?
- they are using present income to finance future savings