Review for Test Two
4 thru 8
Terms to Know:
Indifference (or “Utility”) Curve
A curve showing the combinations of all of the different bundles of
goods that provide the consumer with the same level of utility.
(The consumer finds all bundles along
the curve equally attractive.)
Additional utility a consumer gets from an additional unit of a good. (MU
Marginal Rate of Substitution: Absolute Slope of the Indifference Curve, measuring the willingness of a
consumer to give up the good on the vertical axis (Good Y) for one more unit of the good on the
horizontal axis (Good X).
MRS = |dY/dX| measured along a utility curve.
If MRS = 2, the consumer is willing to give up, at most, 2 units of Y to get one more
unit of X.
: A good that a consumer can trade for another good, in fixed units, and
receive the same level of utility.
A good whose utility level depends on its being used in a fixed proportion with another good.
: A curve showing all the bundles a consumer can buy when spending all of their
Income Elasticity of Demand
Percent change in quantity demanded when income goes up 1%.
= percent change in
: consumers buy more of the good when their income goes up E
Types of Normal Goods:
Superior (or Luxury) Good
: 0< E
Curve showing how consumption of good (usually on horizontal axis) varies with income
Effect of changing utility, keeping the slope the same.
Note: it is possible to have an “income” effect even when income is unchanged.
What we call an
income effect is really an utility effect (moving to a higher or lower curve between points that
have the same slope on each curve).