Consumer Choice Theory Flashcards

ECN 212 ASU ASSIGNMENT Consumer Choice Theory
🎯 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.

💰 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:
−
𝑃
𝑥
/
𝑃
𝑦

⚖️ Utility Maximization
11. What is the utility-maximizing condition? A:
𝑀
𝑈
𝑥
/
𝑃
𝑥
=
𝑀
𝑈
𝑦
/
𝑃
𝑦

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
𝑀
𝑈
𝑥
/
𝑃
𝑥
>
𝑀
𝑈
𝑦
/
𝑃
𝑦
? 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.

📈 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 can’t 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.

🔄 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:
𝑀
𝑅
𝑆
=
𝑀
𝑈
𝑥
/
𝑀
𝑈
𝑦

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:
𝑃
𝑥
/
𝑃
𝑦

25. What does a steep indifference curve imply? A: The consumer values the good on the horizontal axis more.

📊 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.

🧮 Mathematical Tools
31. What is the formula for a budget constraint? A:
𝑃
𝑥
⋅
𝑋
+
𝑃
𝑦
⋅
𝑌
=
𝐼

32. How do you graph a budget line? A: Plot intercepts:
𝐼
/
𝑃
𝑥
and
𝐼
/
𝑃
𝑦
, 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.

🧠 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.

🧪 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.

🧩 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 complements—goods 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:
𝑈
=
𝑓
(
𝑋
,
𝑌
)
, 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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