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Utility 1
Utility 2
Demand 1
Demand 2
Misc.
100
These are the three assumptions of the utility model.
What are: completeness, transitivity, and "more is better"
100
This is the general functional form of the budget constraint
What is I = Px*X + Py*Y
100
This is the inverse demand function for Q = a-bP
What is P = (a/b) - (1/b)Q
100
In words, this is what the price elasticity of demand measures
What is the percent change in quantity demanded in response to a 1% change in price.
100
This is the mathematical equation for the definition of marginal utility
What is change in utility = change in X * MUx + change in Y * MUy
200
This is the mathematical representation of "the total amount of money spent on good Y"
What is Y*Py
200
This is the y intercept, x intercept, and slope of the budget constraint.
What is y intercept = I/Py , x intercept = I/Px, slope of budget constraint = Px/Py
200
In words, this is what the substitution effect measures
What is the effect on consumption as a result of a change in the price of good X - it says that when the price of X rises, you will shift consumption away from X and towards Y.
200
to raise total expenditure on an inelastic good, a business manager should do this to the price
What is raise the price
200
the indifference curve map for this kind of good (on Y axis) is a series of vertical lines
What is a useless good
300
This is the functional form of the utility function for someone with "Cobb-Douglas" preferences
What is U(X,Y) = (X^a)(Y^b) such that a + b = 1
300
In words, this is what the marginal rate of substitution measures.
What is "how much of good Y I am willing and able to give up to consume one more unit of good X and remain equally happy"
300
In words, this is what the income effect measures
What is the effect on consumption as a result in the change in the price of X - it says that when the price of X rises, real income decreases, so for a normal good, consumption of X will decrease.
300
this is the formula for point price elasticity of demand for a linear demand curve
What is e = -b P/Q
300
This kind of good has an inverse relationship with income - that is, as income rises, quantity demanded for this good falls.
What is an inferior good
400
Based on your knowledge from Proof # 1, this is a description (in words) of the consumption choices that will be made by a person with preferences given by U(X,Y) = (X^1/3)(Y^2/3)
This person will spend 1/3 of their income on good X and 2/3 of their income on good Y.
400
These are the two conditions for utility maximization
What is 1. spend all income and 2. MRS = Px/Py
400
In words, this is what compensating variation measures.
What is the amount of money required to compensate the consumer for the harm caused by an increase in prices, to retain original utility levels.
400
For a linear demand curve points in this region will have a point elasticity greater that 1.
What are points above midpoint price
400
This is the definition of consumer surplus
What is the difference between what you are willing to pay for a good, and what you actually pay. It approximates the extra welfare you gain from participating in a transaction.
500
This is the mathematical representation of: "a demand function Q(P,I) is homogeneous of degree zero".
What is Q(tP,tI) = (t^0) Q(P,I)
500
For a person with U(X,Y) = sqrt(XY) and a budget constraint given by: 100 = 5X + 2Y, this is the utility maximizing consumption bundle
This person spends half their income on good X and half their income on good Y. Thus, they will consume (10,25).
500
Describe in words the steps required to find the substitution effect of an increase in the price of good X on a graph.
Step 1: pivot in the budget constraint to represent change in price Step 2: draw a line parallel to the new budget constraint that is tangent to original utility curve 3. identify point of tangency 4. change in consumption between original utility max point and new point of tangency = substitution effect.
500
In Proof # 2, we proved that point elasticity on a linear demand curve is equal to the ratio of distances between y intercept and price and between origin and price. Use a graph to illustrate what this tells us about point elasticity above midpoint price and below midpoint price.
see blackboard
500
To build an individual demand curve from an indifference curve map, this is where each ordered pair (Qx,Px) comes from.
What is the Qx is the quantity of X that maximizes utility subject to a budget constraint with the price of X = Px.