Indifference curves, budget constraints, and utility maximization concepts at college depth beyond the AP-level treatment.
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- Define the weak axiom of revealed preference (WARP).
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If a bundle A is chosen when bundle B is affordable, then B can never be chosen when A is affordable. It reflects consistency in choice behavior.- What does it mean for a preference relation to be complete?
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For any two bundles A and B, the consumer can always say whether A is preferred to B, B is preferred to A, or they are indifferent.- What does it mean for a preference relation to be transitive?
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If A is preferred to B and B is preferred to C, then A is preferred to C. Ensures consistency across bundles.- Define the marginal rate of substitution (MRS).
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The rate at which a consumer is willing to trade one good for another while maintaining the same utility level.- How is the marginal rate of substitution related to the indifference curve?
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The MRS equals the absolute value of the slope of the indifference curve at any point.- Express the MRS between goods X and Y in terms of marginal utilities.
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MRS = MU_X / MU_Y, where MU denotes marginal utility.- Define a normal good.
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A good whose quantity demanded increases when consumer income rises, holding prices constant.- Define an inferior good.
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A good whose quantity demanded decreases when consumer income rises, holding prices constant.- Define a Giffen good.
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A (necessarily inferior) good for which quantity demanded increases when its own price rises, due to the income effect outweighing the substitution effect.- Define a Veblen good (snob good).
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A good for which quantity demanded increases as its price rises because consumers perceive higher price as a signal of higher status or quality.- How does a Giffen good differ from a Veblen good in economic explanation?
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A Giffen good's demand rises with price due to income effects in traditional preference theory; a Veblen good's demand rises with price because price itself affects preferences or perceived quality.- Write the budget constraint for a two-good consumer problem.
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P_X * X + P_Y * Y = I, where P denotes price, X and Y are quantities, and I is income.- How does an increase in income affect the budget line?
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The budget line shifts outward (away from the origin), parallel to the original line, expanding the set of affordable bundles.- How does an increase in the price of good X (holding income and P_Y constant) affect the budget line?
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The X-intercept decreases and the budget line rotates inward around the Y-intercept, shrinking the affordable set.- What condition must hold at the consumer's utility-maximizing bundle?
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The marginal rate of substitution must equal the price ratio: MRS = P_X / P_Y.
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