Microeconomics Chap 3

List with specific quantities of one or more goods.

Completeness: can compare and rank all possible baskets.
Transitivity: prefers basket A from basket B. Consumer will prefer basket A from basket C.
More is better than less:

Curve representing all combinations of market baskets that provide a consumer with the same level of satisfaction.

Graph Containing a set of indifference curves showing the market baskets among which a consumer is indifferent.

Maximum amount of a good that a consumer is willing to give up in order to obtain 1 additional unit of another good.

Bowed inward, slope of the indifference curve increases as we move down along the curve.

Two goods for which the marginal rate of substitution of one for the other is a constant. EX: Orange juice & Apple juice.

Two goods for which the MRS is 0 or infinite; the indifference curves are shaped as right angles. EX: Left shoe & right shoe

Good for which less is preferred rather than more.

Numerical score representing the satisfaction that a consumer gets from a given market basket.

Formula that assigns a level of utility to individual market baskets.

We know only that U3 is better than U2, and U2 is better than U1. We do not, however, know how much one is preferred to the other.

Utility function that generates a ranking of market baskets in order of most to least preferred.

Utility function describing by how much one market basket is preferred to another.

Constraints that consumers face as a result of limited incomes.
-money income
-price of good

all combinations of goods for which the total amount of money spent is equal to income.

Divide both sides of equation by Pc and then solve for C:
C=(I/Pc)-(Pf/Pc)F

It has a vertical intercept of: I/Pc
Represent the maximum amount C that can be purchased with income I.
Slope: -(Pf/Pc)

-(Pf/Pc) is the negative of the ratio of the prices of the two goods. The rate at which the two goods can be substituted for each other w/o changing the total amount of money spent.

a change of income increases (prices unchanged) causes the line to shift parallel outward. If income falls the line shifts inward.

C=(I/Pc)-(Pf/Pc)F

If the food price decreases the line goes outward (purchase more). If the it increases line goes inward (purchase less). People who purchase clothes are unaffected.

Since slope of budget line is equal to the ratio of the 2 prices, it will remain the same. The intercept of the budget line must shift so that it is parallel to the old one.
Ex: If both prices fall by half, the slope line does not change. However, both intercepts double, and the budget line is shifted outward.

choose goods to maximize the satisfaction they can achieve, given the limited budget available to them with 2 conditions:
1. It must be located on the budget line
2. It must give the consumer the most preferred combination of goods and service.

Benefit from the consumption of one additional unit of a good.

Cost of one additional unit of good.

Situation in which the marginal rate of substitution of one good for another in a chosen market basket is not equal to the slope of the budget line.

MRS is greater or equal to P Ic/Py.
Ice cream(Ic)
Yogurt (y)

Additional satisfaction obtained from consuming one additional unit of a god.

Principle that as more of a good is consumed, the consumption of additional amounts will yield smaller additions to utility.

Principle that the utility is maximized when the consumer has equalized the marginal utility per dollar of expenditure across all goods.