studyguide_for_ch5

# studyguide_for_ch5 - Outline of Chapter 5 1 Define the...

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Outline of Chapter 5 1. Define the budget constraint and explain how to interpret its slope. 2. Describe how a budget constraint will change in response to a change in income or prices. 3. Define utility and marginal utility and state the law of diminishing marginal utility. 4. Explain and justify the assumptions economists make about preferences in order to develop the theory of consumer choice. 5 Understand the general shape of indifference curve, and the reason of its convexity. 6. Explain how to find the consumer’s decision using indifference curve, as well as marginal utility/price approach. 7. Describe the substitution and income effects of a price change by both diagram and statement. 8. Explain how price changes affect consumer behavior and use this information to construct an individual demand curve. (why demand curve of a good is always sloping downward) Sample questions: 1. Suppose that Trey spends all of his income on vacation trips and textbooks. If the price of a trip is \$200 and the price of a textbook is \$50, then the slope of his budget line (assuming vacation trips are measured on the vertical axis) would be a. -4 b. 4 c. 0.25 d. -1.75 e. -0.25

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## This test prep was uploaded on 04/07/2008 for the course ECON 202 taught by Professor Guokai during the Spring '07 term at Ole Miss.

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studyguide_for_ch5 - Outline of Chapter 5 1 Define the...

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