satisfaction per dollar from x
🛒MICROECONOMICS STUDY GUIDE
Consumer Choice and Budget Constraints
Use marginal utility, budget lines, and opportunity cost to explain household purchase decisions.
8 key ideas8 flashcards5 practice questions
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Spend the next dollar where it adds the most satisfaction.
move spending toward the larger ratio
satisfaction per dollar from y
Key ideas to know
Start with the relationships between ideas. Then close the notes and explain each one from memory.
- 01
A budget constraint lists affordable bundles at stated prices and income.
- 02
Its slope equals the negative ratio of the two goods' prices.
- 03
Opportunity cost measures what must be given up for one more unit.
- 04
Total utility records satisfaction from a bundle, while marginal utility records the addition from one more unit.
- 05
Diminishing marginal utility means extra units often add less satisfaction than earlier units.
- 06
A utility-maximizing bundle equalizes marginal utility per dollar across purchased goods when an interior solution exists.
- 07
An income rise shifts a budget line outward without altering its slope when prices stay fixed.
- 08
A price movement rotates the budget line and alters both purchasing power and relative price.
PART OF THE MICROECONOMICS GUIDE
See every set in this course and follow a focused review order.
Open the full Microeconomics guide →Two ideas worth correcting now
NOT QUITE
→The cheapest bundle gives the most satisfaction
USE THIS INSTEAD
The choice depends on preferences, prices, and income together.
NOT QUITE
→Equal marginal utilities define the optimum
USE THIS INSTEAD
Marginal utility per dollar is the relevant comparison.
Flashcards
Answer before opening each card. The effort to retrieve is part of the learning.
1What sets a budget line's intercepts?Show answer ＋
Income divided by each good's price.
2What sets its slope?Show answer ＋
The negative price ratio.
3What is marginal utility?Show answer ＋
The added satisfaction from one more unit.
4What does diminishing marginal utility state?Show answer ＋
Added satisfaction usually falls as more units are consumed.
5What ratio is equalized at an interior optimum?Show answer ＋
Marginal utility per dollar across goods.
6What does an income rise do to the line?Show answer ＋
Shifts it outward in parallel if prices stay fixed.
7What does one good's price fall do?Show answer ＋
Rotates the line outward on that good's axis.
8What is opportunity cost on the budget line?Show answer ＋
Units of one good surrendered for another.
Explain it in your own words
Use the answer as a check after you have written or spoken your response.
01Why is a bundle outside the budget line unavailable?
Its total spending exceeds income at the stated prices.
02How does a shopper reallocate when MUx/Px exceeds MUy/Py?
Buy more x and less y until the ratios equalize or a boundary is reached.
03Why does a price fall have two effects?
It raises purchasing power and makes that good cheaper relative to the other.
04Can utility be compared numerically across people?
Standard consumer theory uses each person's ranking rather than interpersonal utility totals.
05Why may an optimum occur at a corner?
The shopper may prefer spending all available income on one good at the stated prices.
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