Consumer's Budget
What two factors determine which combinations of goods a consumer can afford?
Consumer income and prices of goods.
What is utility in Consumer Theory?
The satisfaction or benefit received from consuming a good or service.
What is consumer equilibrium?
The point where a consumer achieves the highest attainable satisfaction within their budget.
According to the Law of Demand, what generally happens to quantity demanded when a product's price increases, other factors remaining constant?
As price increases, quantity demanded generally decreases, holding other factors constant.
A student's allowance increases, while the prices of both goods remain unchanged. What happens to the budget line?
The budget line shifts outward, allowing the student to afford more combinations of goods.
What is the term for the additional satisfaction received from consuming one more unit of a good?
Marginal utility.
What is the main goal of a consumer when making purchasing decisions under a limited budget?
To maximize satisfaction or utility while staying within their budget.
Milk tea increases from ₱100 to ₱150, while iced coffee remains at ₱90. A student switches to iced coffee. Which economic effect explains this decision?
The substitution effect.
A student has ₱200. Meals cost ₱50 and drinks ₱25. If the student buys 2 meals, how many drinks are affordable with the remaining budget?
4 drinks. Two meals cost ₱100, leaving ₱100 for four drinks.
A hungry student enjoys the first slice of pizza more than the fifth slice. Which economic principle explains why the additional satisfaction from each slice generally decreases?
The Law of Diminishing Marginal Utility.
At an interior consumer optimum, what is the MRS equal to?
The price ratio, P1/P2.
What effect occurs when a price change alters a consumer's real purchasing power?
The income effect.
What happens to the budget line when the price of one good increases, while income and the other good's price remain unchanged?
The budget line rotates inward toward the origin on the axis of the more expensive good.
Why can two indifference curves representing different satisfaction levels never intersect under consistent consumer preferences?
An intersection would imply that the same combination of goods provides two different satisfaction levels, contradicting consistent preferences.
Why is a consumer most satisfied when their willingness to trade one good for another matches the goods’ price ratio?
Because the consumer is getting the most satisfaction possible from their budget, so changing how they spend their money would not improve their overall satisfaction.
How is an individual demand curve derived from optimal consumer choices?
By plotting the optimal quantities chosen at different prices, holding income and preferences constant.
What is the mathematical equation of a consumer’s budget constraint for two goods?
PxX + PyY = I, where prices multiplied by quantities cannot exceed income.
What does the Marginal Rate of Substitution (MRS) measure?
How much of one good a consumer is willing to give up for an additional unit of another while maintaining the same satisfaction.
What condition must hold at an interior consumer optimum under standard assumptions about smooth preferences?
The marginal rate of substitution (MRS) must equal the price ratio: MUx/MUy = Px/Py.
When pizza costs ₱50, a consumer buys 1 pizza. When the price falls to ₱20, the consumer buys 3 pizzas. By how many pizzas does quantity demanded change, and what type of change is this?
Quantity demanded increases by 2 pizzas. This is a movement along the demand curve caused by a change in the product's own price.