question
Why is the shape of an indifference curve convex?
answer
Preference for a balanced bundle
question
When is the indifference curve linear?
answer
Perfect Substitutes
question
Why do perfect substitutes have a linear indifference curve?
answer
MRS is constant, there is no preference for X or Y
question
What does a diminishing MRS imply?
answer
Downward sloping indifference curve
question
When is the MRS equal to the price ratio?
answer
Optimum point
question
When two goods are perfect substitutes the consumer will...
answer
consume one or the other depending on which one is cheaper
question
Why do we use the method of the Lagrange multipliers?
answer
to turn a constrained maximization problem into an unconstrained maximization problem
question
When is a good not normal or inferior?
answer
When it does not depend on I (income)
question
When is a good either normal or inferior
answer
When it depends on I (income)
question
When is the slope of an indifference curve equal to the MRS?
answer
Always
question
With CES utility, how does an increase in Py affect X?
answer
It depends on the value of σ aka the elasticity of substitution (>1, <1, normal, inferior etc...)
question
Normal good
answer
demand increases as income increases
question
Inferior good
answer
demand decreases when income increases
question
homogeneity
answer
quantities remain unchanged when price and income changes
question
Inelastic demand
answer
increase or decrease in price will not significantly affect demand for the product
question
Elastic demand
answer
changes in price have large effects on the amount demanded
question
unit elastic demand
answer
percent change in quantity demanded is equal to the percent change in price, so the price elasticity is equal to 1 in absolute value
question
Cross price elasticity
answer
change in demand for product A in response to a percentage change in price of product B
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