econ ch 3 consumer behavior

• What is consumer behavior?

  The study of consumer income allocation
• What is a market basket?

  A combination of goods/services with quantities
• What does completeness in consumer behavior imply?

  Consumers can rank all baskets
• What is transitivity in consumer preferences?

  If A is preferred to B, and B to C, then A is preferred to C
• What does "more is better" mean in consumer behavior?

  Consumers prefer more of any good to less
• What does an indifference curve represent?

  Combinations of goods yielding the same satisfaction
• What is an indifference map?

  A set of indifference curves showing preference levels
• What is the marginal rate of substitution (MRS)?

  The rate at which one good is traded for another
• What does diminishing MRS indicate?

  MRS declines as more of one good is consumed
• What are perfect substitutes?

  Goods substituted at a constant rate
• What are perfect complements?

  Goods consumed together in fixed ratios
• What is utility?

  A numerical measure of satisfaction
• What does a utility function do?

  Assigns utility value to each basket
• What is ordinal utility?

  Ranks preferences without measuring intensity
• What is cardinal utility?

  Measures how much one basket is preferred over another
• What is a budget constraint?

  Represents all baskets a consumer can afford
• What is a budget line?

  Combinations of goods where total spending equals income
• What happens to the budget line with income changes?

  It shifts parallel
• What effect do price changes have on the budget line?

  It rotates around one intercept
• What is consumer choice?

  Choosing the most preferred affordable basket
• What is utility maximization?

  Occurs where indifference curve is tangent to budget line
• What is marginal benefit?

  Additional satisfaction from one more unit of a good
• What is marginal cost?

  Opportunity cost of consuming more of a good
• What is a corner solution?

  Optimal choice lies on an axis—consume only one good
• What is marginal utility (MU)?

  Additional utility from one more unit of a good
• What does diminishing MU mean?

  MU decreases as more of a good is consumed
• What is the equal marginal principle?

  Utility is maximized when MU per dollar is equal
• What is a cost-of-living index?

  Compares cost of attaining a utility level now vs. in the past
• What is an ideal index?

  Compares cost of attaining the same utility across periods
• What is a Laspeyres index?

  Uses base-year consumption bundle; overstates inflation
• What is a Paasche index?

  Uses current-year bundle; understates inflation
• What is a fixed-weight index?

  Keeps quantities fixed
• What is a chain-weighted index?

  Adjusts for changes in quantities