Chapter 3 Review - Chapter 3 Theory of Consumer Behavior...

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Chapter 3: Theory of Consumer Behavior LEARNING OBJECTIVES Understand the concept of total utility. Understand the concept of marginal utility. Be able to apply the Law of Diminishing Marginal Utility. Define an indifference curve and apply the Law of Diminishing Marginal Utility to Indifference curve analysis. Explain what an indifference curve map is and determine which indifference curves on a map represent more or less total utility. Compare and contrast the assumptions regarding the analysis of total utility received by the consumer. Address both the marginal utility and indifference curve approaches to consumer behavior. Define the budget constraint and be able to discuss the two factors that determine its position and slope. State and address Engel’s Law. CHAPTER SUMMARY The major points made in the chapter may be summarized as follows: 1. The budget constraint represents the amount of income the consumer has to commit to consumption in the current period. A proportional change in all prices and income has no effect on the budget constraint. For this reason, economists argue that only relative price changes matter. When presented graphically, the budget constraint is frequently referred to as the budget line.
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