MBA 701 - Exam 2 Notes Questions and
Answers Rated A
What is Consumer's Optimization Problem? – answer Individual consumption decisions
are made with the goal of maximizing total satisfaction from consuming various goods
and services.
*Subject to the budget/spending constraint that spending on goods exactly equals the
individual's money income.*
What are Consumption Bundles? - answerThe combination of goods or services that
consumers consume or purchase (i.e. different combination bundles of coke and pizza;
good X and good Y).
Example: you are a consumer and you want to buy lunch. If your budget is $20, you
cannot spend more than $20, but want to spend in a way that gets the most out of every
dollar being spent (maximizing total level of satisfaction).
What are the Consumer Theory criteria/assumptions in order to study consumer's
decision-making process? - answerAssumes ALL buyers are completely informed
about:
- Range of products available in the market
- Prices of all products in the market
- Capacity of products to satisfy wants given their incomes
What is required in Consumer Theory after all criteria/assumptions have been met? -
answerRequires that consumers can rank all consumption bundles based on the level of
satisfaction they would receive from consuming the various bundles.
Give an example of a consumption bundle - answerLets say you are buying a lunch that
is made of two goods-pizza (good Y) and coke (good X). If there are different bundles
(combinations) of the two goods, you should be able to say "if I buy this bundle, it's
better than the other bundle"
What are the 3 properties of consumer preferences? - answer1. Completeness
2. Transitivity
3. Nonsatiation
*without these 3 it would be impossible to study consumer preference*
,Explain the characteristics of completeness consumer preference - answer- Consumers
are able to rank all conceivable bundles of commodities
- For consumption bundles, A and B, the consumer can say one of the following:
A is preferred to B,
B is preferred to A,
or The consumer is indifferent between A and B
Explain the characteristics of transitivity consumer preference - answer- If A is preferred
to B, and B is preferred to C, then A MUST be preferred to C
Example: if coke-pizza > salad-water, and salad-water > burger-pepsi, then coke-pizza
> burger-pepsi
Explain the characteristics of nonsatiation consumer preference - answer- More of a
good is always preferred to less
What is utility? - answerBenefits consumers obtain from goods & services they
consume is utility (level of satisfaction or happiness)
What is the utility function and what does it show? - answerU = f(X, Y)
Shows an individual's perception of the utility level attained from consuming each
conceivable bundle of goods.
What is an Indifference Curve (I)? - answera set of points representing different bundles
of goods and services, each of which yields the same level of total utility.
What are the two key attributes to an indifference curve? - answer1. they are
downward-sloping
2. they are convex functions
What is Marginal Rate of Substitution (MRS)? - answerMeasures the number of units of
Y that must be given up per unit of X added so as to maintain a constant level of utility.
(Delta = "change in")
MRS = - (delta Y / delta X)
Can also be found by *MRS = MUx / MUy*
What are the two key characteristics of Marginal Rate of Substitution (MRS)? - answer1.
Negative of the slope of the indifference curve
2. Diminishes along the indifference curve as X increases and Y decreases
What are Indifference Maps? - answer- Consists of several indifference curves
- The higher (or further to the right) an indifference curve, the greater the level of utility
associated with the curve.
, - Combinations of goods on higher indifference curves are preferred to combinations on
lower curves.
What is Marginal Utility (MU)? - answerThe change in total utility caused by the
consumption of one additional unit of a good to the current rate of consumption, holding
all other goods consumed constant.
What is the equation for marginal utility? - answerU = utility and X = a good (i.e. pizza)
MUx = delta U / delta X
What is Consumer's Budget Line? - answerShows all possible bundles of goods that
can be purchased at given prices if the entire income is spent.
What are the Consumer Budget Line equations? - answerM = Px(X) + Py(Y)
Budget = price of pizza*(# of pizzas) + price of coke*(# of cokes)
or
Y = (M / Py) - (Px / Py)*X
*^can be looked at as Y = a + b(X)*
What causes a shift in budget lines? - answer1. Change in income will shift line
completely
2. Change in price of one variable will shift quantity of that variable keeping the other
constant.
What is Utility Maximization? - answerSubject to a limited income, occurs at the
combination of goods for which the indifference curve is just tangent to the budget line.
- (delta Y / delta X) = MRS = Px / Py
What must go on in order to maximize utility? - answerConsumer must allocate income
so that the marginal utility per dollar spent on each good is the same for all commodities
purchased.
MRS = MUx / MUy = Px / Py
MUx / Px = MUy / Py
Where would you find Constrained Utility maximization in an indifference map? -
answerIn an indifference map, the curve that has the same slope/tangent line as the
budget line contains the utility maximization point (where the two meet-point B in the
picture).
What is Individual Consumer Demand? - answerAn individual's demand curve for a
specific commodity relates utility-maximizing quantities purchased to market prices.
Answers Rated A
What is Consumer's Optimization Problem? – answer Individual consumption decisions
are made with the goal of maximizing total satisfaction from consuming various goods
and services.
*Subject to the budget/spending constraint that spending on goods exactly equals the
individual's money income.*
What are Consumption Bundles? - answerThe combination of goods or services that
consumers consume or purchase (i.e. different combination bundles of coke and pizza;
good X and good Y).
Example: you are a consumer and you want to buy lunch. If your budget is $20, you
cannot spend more than $20, but want to spend in a way that gets the most out of every
dollar being spent (maximizing total level of satisfaction).
What are the Consumer Theory criteria/assumptions in order to study consumer's
decision-making process? - answerAssumes ALL buyers are completely informed
about:
- Range of products available in the market
- Prices of all products in the market
- Capacity of products to satisfy wants given their incomes
What is required in Consumer Theory after all criteria/assumptions have been met? -
answerRequires that consumers can rank all consumption bundles based on the level of
satisfaction they would receive from consuming the various bundles.
Give an example of a consumption bundle - answerLets say you are buying a lunch that
is made of two goods-pizza (good Y) and coke (good X). If there are different bundles
(combinations) of the two goods, you should be able to say "if I buy this bundle, it's
better than the other bundle"
What are the 3 properties of consumer preferences? - answer1. Completeness
2. Transitivity
3. Nonsatiation
*without these 3 it would be impossible to study consumer preference*
,Explain the characteristics of completeness consumer preference - answer- Consumers
are able to rank all conceivable bundles of commodities
- For consumption bundles, A and B, the consumer can say one of the following:
A is preferred to B,
B is preferred to A,
or The consumer is indifferent between A and B
Explain the characteristics of transitivity consumer preference - answer- If A is preferred
to B, and B is preferred to C, then A MUST be preferred to C
Example: if coke-pizza > salad-water, and salad-water > burger-pepsi, then coke-pizza
> burger-pepsi
Explain the characteristics of nonsatiation consumer preference - answer- More of a
good is always preferred to less
What is utility? - answerBenefits consumers obtain from goods & services they
consume is utility (level of satisfaction or happiness)
What is the utility function and what does it show? - answerU = f(X, Y)
Shows an individual's perception of the utility level attained from consuming each
conceivable bundle of goods.
What is an Indifference Curve (I)? - answera set of points representing different bundles
of goods and services, each of which yields the same level of total utility.
What are the two key attributes to an indifference curve? - answer1. they are
downward-sloping
2. they are convex functions
What is Marginal Rate of Substitution (MRS)? - answerMeasures the number of units of
Y that must be given up per unit of X added so as to maintain a constant level of utility.
(Delta = "change in")
MRS = - (delta Y / delta X)
Can also be found by *MRS = MUx / MUy*
What are the two key characteristics of Marginal Rate of Substitution (MRS)? - answer1.
Negative of the slope of the indifference curve
2. Diminishes along the indifference curve as X increases and Y decreases
What are Indifference Maps? - answer- Consists of several indifference curves
- The higher (or further to the right) an indifference curve, the greater the level of utility
associated with the curve.
, - Combinations of goods on higher indifference curves are preferred to combinations on
lower curves.
What is Marginal Utility (MU)? - answerThe change in total utility caused by the
consumption of one additional unit of a good to the current rate of consumption, holding
all other goods consumed constant.
What is the equation for marginal utility? - answerU = utility and X = a good (i.e. pizza)
MUx = delta U / delta X
What is Consumer's Budget Line? - answerShows all possible bundles of goods that
can be purchased at given prices if the entire income is spent.
What are the Consumer Budget Line equations? - answerM = Px(X) + Py(Y)
Budget = price of pizza*(# of pizzas) + price of coke*(# of cokes)
or
Y = (M / Py) - (Px / Py)*X
*^can be looked at as Y = a + b(X)*
What causes a shift in budget lines? - answer1. Change in income will shift line
completely
2. Change in price of one variable will shift quantity of that variable keeping the other
constant.
What is Utility Maximization? - answerSubject to a limited income, occurs at the
combination of goods for which the indifference curve is just tangent to the budget line.
- (delta Y / delta X) = MRS = Px / Py
What must go on in order to maximize utility? - answerConsumer must allocate income
so that the marginal utility per dollar spent on each good is the same for all commodities
purchased.
MRS = MUx / MUy = Px / Py
MUx / Px = MUy / Py
Where would you find Constrained Utility maximization in an indifference map? -
answerIn an indifference map, the curve that has the same slope/tangent line as the
budget line contains the utility maximization point (where the two meet-point B in the
picture).
What is Individual Consumer Demand? - answerAn individual's demand curve for a
specific commodity relates utility-maximizing quantities purchased to market prices.
