Ch31 Indifference curve and budget line

Front

What does an indifference curve show?

Back

An indifference curve shows the combinations of two goods that give the consumer equal satisfaction or utility.

Front

Why do indifference curves never cross?

Back

Indifference curves never cross because if they crossed the consumer would not be acting in a rational way.

Front

What is the marginal rate of substitution?

Back

The marginal rate of substitution is the slope of an indifference curve. It represents the rate at which a consumer is willing to substitute one good for another.

Front

What happens to real income when the price of a good changes?

Back

When there is a change in the price of a good, the consumer has more or less money to spend on other goods. Real income has increased or decreased. When the price of a good falls, real income increases. When the price of a good increases, real income decreases.

Front

What is the substitution effect of a price change?

Back

The substitution effect of a price change is always positive. It refers to a situation where following a price change, a consumer will substitute the cheaper good for one that is now relatively more expensive.

Front

What is a Giffen good?

Back

A Giffen good is a particular type of inferior good. The quantity demanded falls as price falls and the quantity demanded increases as price increases.