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(5hours)
Key points:
1. Three parts and three assumptions of consumer behaviour theory
2. Consumer Choice and Utility
3. Total Utility (TU) and Marginal Utility (MU). The law of diminishing marginal utility
Give the definitions to the following terms:
- Consumer
- Utility
- Ordinalism
- Cardinalism
- Total Utility
- Marginal Utility
Answer the following questions:
1. What are the main assumptions of Consumer Behavior concept? Give the explanation of each of them.
2. What are the basic conditions for the consumer choice?
3. What is the difference between total and average utility?
4. Provide the explanation of the law of diminishing marginal utility. Can you remember any example when the law doesn’t act?
5. Why do you think it’s necessary to study the consumer behavior?
Define if the statement true or false:
1. If preferences are transitive, more is always preferred to less.
2. Preferences are not complete which means that consumer can’t compare and rank all market baskets, ignoring costs in this case).
3. According to the basic assumption of consumer behaviour theory all goods are desirable
4. The objective in microeconomics is to minimize the satisfaction of individuals given their preferences, incomes and the prices of goods they buy.
5. When AU is a maximum, MU = TU. When TU is a maximum, MU is a maximum too.
6. There is no relationship between total utility and marginal utility.
7. A cardinal concept believes that individual preferences can be easily quantified or measured in terms of basic unit with the help of “utils”.
8. Market basket is a collection of one or more commodities.
9. Budget constraint is not taken into account under considering consumer’s choice.
10. Diminishing marginal utility law doesn’t have any exception.
Solve the tasks:
1. Using the data in the table below calculate the values of total and marginal utilities:
| Quantity of the goods | А-good | В-good | С-good | |||
| TU | MU | TU | MU | TU | MU | |
2. Utility function of a consumer is U (x) = 12x – x 2, when х is the quantity of the biscuit consumer eats. What quantity of biscuits brings maximum satisfaction to the consumer? Show the graphical explanation.
3. Which of the following ranks of total utility demonstrates the law of diminishing utility?
а) 20, 30, 40, 50; b) 20, 28, 34, 38; c) 20, 40, 80, 160; d) 20, 35, 55, 80.
Links and references:
http://www.saylor.org/site/wp-content/uploads/2012/07/ECON101-Reynolds-Consumer-Behavior.pdf
Topic 3. Theory of ordinalism of consumer behavior theory (5 hours)
1. Indifference curves and their properties. Marginal rate of substitution goods.
2. Budget line. The effects of changes in income and prices
3. Equimarginal Principle and Consumer equilibrium
Give the definitions to the following terms:
Indifference curve
Indifference map
Marginal rate of substitution
Budget constraint
Consumer equilibrium
Answer the following questions:
1. What are the main properties of indifference curves?
2. Give the formula of MRS.
3. What are the effects of price and income changes for the budget line? Demonstrate graphically.
4. Provide the second law of G. Gossen. What is the formula for it?
5. How to express consumer equilibrium with the help of the indifference curve and budget line?
Define if the statement true or false:
1. The budget set is the collection of all bundles of goods that a consumer can buy with his/her income at the prevailing market prices.
2. The budget line represents all bundles which cost the consumer her entire income and it is positively sloping.
3. The budget set changes only if the income changes.
4. The consumer has well-defined preferences over the collection of all possible bundles.
5. The consumer’s preferences are assumed to be monotonic.
6. An indifference curve is a locus of all points representing bundles among which the consumer is not indifferent.
7. Monotonicity of preferences implies that the indifference curve is downward sloping.
8. A consumer’s preferences can be represented by an indifference map.
9. A consumer’s preferences, in general, can be represented by a utility function.
10. A rational consumer always chooses his/her most preferred bundle from the budget set.
Solve the tasks:
1. Fill the gaps in the table below using the basic formulas of consumer behavior:
| ТU (х 1, х 2) | MU (х 1) | MU (х 2) | MRS (х 1, х 2) |
| 3 х 12+ х 23 | |||
| 4 х 1+ 6 х 2 | |||
| х 1 х 2 |
2. Utility function of Dan is T U (А,В) = АВ, when А is a quantity of apples, В is a bananas quantity. What is the slope of indifference curve at the point of 15 apples and 30 bananas?
3. Utility function expressed by the formula U = ХУ, consumer’s income is 24 hrn. X-good price is 2 hrn, Y-good price is 3 hrn. Calculate the optimal quantity of X and Y goods consumer can get within the given budget and the maximum value of utility from it.
4. Using the data of the indifferent curve bundles, presented in the table below and the information about prices of the goods (shirts price is 100 and trousers price is 300), define the optimal combination of these goods for the consumer who buys them at one market basket.
| Shirts | ||||||
| Trousers |
5. Using the graph below define the price of the B-good if you know that A-good is 18 hrn. Write down the budget line equation and suggest the budget line position change if A-good price changes to 30 hrn per unit.
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Topic 4. Analysis of consumer behavior (5 hours)
Income Consumption Curve. Engel Curves
Price Consumption Curve
Income and Substitution Effects
Give the definitions to the following terms:
Income-consumption curve
Engel curve
Tornkvist figures
Price-consumption curve
Income effect
Substitution effect
Price effect
Answer the following questions:
1. What is the difference between Income Consumption Curve and Engel Curve?
2. What are the main kinds of goods are presented at Tornkvist figures?
3. What are the main approaches to decomposition of income and substitution effects and what is the difference between them?
4. What is the specific of general effect for Giffen goods?
Solve the following complex task (choose the variant according to the number in the list of the group):
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| Topic 1. The Subject matter and method of microeconomics | | | Main Requirement to the Design of the Assignment |