Flashcards on Indifference Approach to Consumer Behavior
Indifference Approach to Consumer Behavior Explained
Tap to flip · Swipe to navigate
Consumer Equilibrium
50 cards
Card 1
Question: What condition on the marginal utilities and prices must hold at consumer equilibrium for two goods x and y?
Answer: MU_x / P_x = MU_y / P_y (the marginal utilities divided by their prices must be equal).
Card 2
Question: How is the equilibrium condition expressed using the marginal rate of substitution (MRS) and prices?
Answer: MRS = MU_x / MU_y = P_x / P_y, so the slope of the indifference curve equals the slope of the budget line at equilibrium.
Card 3
Question: What geometric condition describes consumer equilibrium on an indifference curve diagram?
Answer: The budget line is tangent to the highest attainable indifference curve (point of tangency gives equilibrium).
Card 4
Question: Why can a consumer increase total utility if the ratios MU/P are not equal across goods?
Answer: Because unequal MU/P ratios mean the consumer can reallocate spending toward the good with higher MU per rand to raise total utility until ratios equa
Card 5
Question: How does the equilibrium condition extend when there are more than two goods?
Answer: MU_x / P_x = MU_y / P_y = MU_z / P_z = …; all goods must have equal marginal utility per unit of price.
Card 6
Question: What does equalizing the weighted marginal utilities mean in practical terms?
Answer: It means the consumer derives the same marginal utility from the last rand spent on each good.
Card 7
Question: At equilibrium, how do the slopes of the budget line and indifference curve compare?
Answer: They are equal: slope of budget line (P_x / P_y) equals slope of indifference curve (MU_x / MU_y or MRS).
Card 8
Question: What happens to attainable and unattainable indifference curves at the equilibrium point as illustrated by the diagram?
Answer: The equilibrium point lies on the highest attainable indifference curve; higher indifference curves lie outside the budget constraint and are unattain
Card 9
Question: Where is the consumer in equilibrium?
Answer: Where the highest indifference curve just touches the budget line (point of tangency).
Card 10
Question: What does the point of tangency on the budget line indicate?
Answer: It indicates the consumer's equilibrium—labeled B on indifference curve U₁ in the example.