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 (х1,х2)	MU (х1)	MU (х2)	MRS(х1,х2)
3х12+ х23
4х1+ 6х2
х1х2

2. Utility function of Dan is TU(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	17	14	11	8	6	4
Trousers	4	5	7	10	13	18

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.