10 things about yourself
Unit 1: Consumer Theory
Tutorial Set 1
PREFERENCES
1. A basic assumption about consumers in microeconomics is that they have preferences over different baskets of goods. Explain the concepts: “preference”, ‘preference order”, and “basket of goods”.
2. a) If there are only two goods, it is possible to illustrate a consumer’s preferences over them with an indifference map. Draw an indifference map with three indifference curves.
b)There are a few standard assumptions about what an indifference map can and cannot look like. Which are these assumptions, and what reasoning lie behind them?
3. a)What is the marginal rate of substitution, MRS? State the definition and explain, in words, what it means.
b)MRS will have an influence on the shape of the indifference curve. What influence?
4. a)Often we assume that consumers have diminishing MRS. Explain what that means and how it is reflected in indifference curves.
b)Draw an indifference curve that does not have diminishing MRS, but that is still allowed.
THE BUDGET LINE
5. a)Explain what substitute and complementary goods are.
b)Draw a diagram for two goods, with the quantity of good A on the X-axis and that of good B on the Y-axis. What will the indifference curves for the substitute goods look like? What will they look like for complementary goods?
6. a)Explain in words what the budget line is.
b)Suppose we have two goods. Price of good 1 is $10 and the price of good 2 is $15. The income is $30. Construct a diagram, with the quantities on the X-and Y-axis, and draw a budget line in the diagram.
7. How do the prices and the income affect the shape of the graph? What happens if the price of one good rises? What happens if income increases?
8. Graph the budget line for apples and oranges, with prices of $2 and $3 respectively and $60 to spend. Now increase the price of apples from $2 to $4 and draw the budget line.
9. Suppose that apples cost $1 each. Water can be purchased for 0.5 cents per gallon
Tutorial Set 1
PREFERENCES
1. A basic assumption about consumers in microeconomics is that they have preferences over different baskets of goods. Explain the concepts: “preference”, ‘preference order”, and “basket of goods”.
2. a) If there are only two goods, it is possible to illustrate a consumer’s preferences over them with an indifference map. Draw an indifference map with three indifference curves.
b)There are a few standard assumptions about what an indifference map can and cannot look like. Which are these assumptions, and what reasoning lie behind them?
3. a)What is the marginal rate of substitution, MRS? State the definition and explain, in words, what it means.
b)MRS will have an influence on the shape of the indifference curve. What influence?
4. a)Often we assume that consumers have diminishing MRS. Explain what that means and how it is reflected in indifference curves.
b)Draw an indifference curve that does not have diminishing MRS, but that is still allowed.
THE BUDGET LINE
5. a)Explain what substitute and complementary goods are.
b)Draw a diagram for two goods, with the quantity of good A on the X-axis and that of good B on the Y-axis. What will the indifference curves for the substitute goods look like? What will they look like for complementary goods?
6. a)Explain in words what the budget line is.
b)Suppose we have two goods. Price of good 1 is $10 and the price of good 2 is $15. The income is $30. Construct a diagram, with the quantities on the X-and Y-axis, and draw a budget line in the diagram.
7. How do the prices and the income affect the shape of the graph? What happens if the price of one good rises? What happens if income increases?
8. Graph the budget line for apples and oranges, with prices of $2 and $3 respectively and $60 to spend. Now increase the price of apples from $2 to $4 and draw the budget line.
9. Suppose that apples cost $1 each. Water can be purchased for 0.5 cents per gallon