Introduction to Economics 1 Dersi 3. Ünite Sorularla Öğrenelim

Define the term 'budget constraint'. 

A Budget constraint is “the combinations of quantities of X and Y that a consumer can purchase with certain amount of income or earning”.

Briefly explain the effect of change in the price of a good on budget line.

If the price of one good increases, the budget line shifts inward, pivoting from the other good’s intercept. If the price of one good decreases, the budget line shifts outward, pivoting from the other good’s intercept.

The maximizing market basket must satisfy two conditions. What are they?

1- It must be located on the budget line.

2 - It must give the consumer the most preferred combination of goods and services. 

Define the term diminishing marginal rate of substitution. 

A diminishing marginal rate of substitution is exhibited when indifference curves are convex, and the slope of the indifference curve increases (becomes less negative) as we move down along the curve.

What is the law of diminishing marginal utility. 

The law of diminishing marginal utility is that the marginal (or additional) utility derived from consuming successive units of a product will eventually decline as the rate of consumption increases.

Explain the term indefference curve briefly. 

An indifference curve can be derived when there are two elements in every choice: (1) preferences (the desirability of various goods) and (2) opportunities (the attainability of various goods). It is related to the former: preferences. It separates better (more preffered) bundles of goods from inferior (less preferred) bundles, providing a diagrammatic picture of how an individual ranks alternative consumption bundles.

What is a total utility?

It is the total satisfaction you derive from consumption; this could refer to either your total utility of consuming a particular good or your total utility from all consumption.

What is a marginal utility?

The change in your total utility from a one-unit change in your consumption of a good .

Explain the law of diminishing marginal utility.

Law of diminishing marginal utility means that the more of a good a person consumes per period, the smaller the increase in total utility from consuming one more unit, other things constant.

What does it mean when the indifference
curve had a positive slope?

If two market baskets are to be equivalent [in utility units], and if one market basket contains more of both commodities, it would mean that one or the other of the commodities is not defined so that more of it is preferred to less. If it sloped upward it would violate the assumption that more of any commodity is preferred to less.

What does MRS stand for and what does it mean? Explain briefly.

The marginal rate of substitution (MRS) is defined as the number of units of good Y that must be given up if the consumer, after receiving an extra unit of good X, is to maintain a constant level of satisfaction or utility.

Explain the Consumer’s optimal choice. 

The consumer chooses between the consumption of the two goods so that the marginal rate of substitution equals the relative price. At the consumer’s optimum, the consumer’s valuation of the two goods equals the market’s valuation.

Explain the cases where we can say that 'demand is elastic'.

When the marginal utility decreases quickly as more of a good is consumed, a fall in the good’s price requires only a small change in consumption to equate the marginal utility per dollar spent on it with the marginal utility per dollar spent on other goods. As a result, the quantity demanded increases very little and so demand is inelastic.

Briefly mention about the conventional demand curve.

Conventional demand curve is that the lower the price, the higher the quantity demanded. This relationship follows the law of demand. It states that the quantity demanded will drop as the price rises, ceteris paribus, or “all other things being equal.”

The relationship between quantity and price will follow the demand curve as long as the four determinants of demand don’t change. Specify these determinants.

1. Price of related goods or services.

2. Income of the buyer.

3. Tastes or preferences of the buyer,

4. Expectation of the buyer, especially about future prices.

Explain the engel curves briefly.

Engel curves, named after 19th Century German statistician Ernst Engel, illustrate the relationship between consumer demand and household income. Engel curves for normal goods slope upwards – the flatter the slope the more luxurious the good, and the greater the income elasticity. In contrast, Engel curves for inferior goods have a negative slope.

How do indeferrence curves depict consumer preferences?

Indifference curves are downward sloping and cannot intersect one another. Consumer preferences can be completely described by an indifference map. The marginal rate of substitution of good X for good Y is the maximum amount of Y that a person is willing to give up to obtaining one additional unit of X.

Is there a highest indifference curve that the budget line can reach on the X or Y axis?

A corner solution exists in a situation in which the budget line reaches the highest achievable indifference curve along an axis (the vertical axis). For example, the consumer may choose to spend all his or her income just on one good, good X. Of course, it is possible to spend all his or her income just on good Y. In this situation, the corner solution will be on the highest achievable indifference curve along the horizontal axis. In non technical terms, a corner solution is possible when the chooser is either unwilling or unable to make a tradeoff. It holds if there is a higher vs. lower preference between, and a perfect substition for two goods.

What does a slope of an indefference curve reveal?

It reveals that the marginal rate of substitution of one good for another good.