Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

108 ADVANCED TOPICS IN CONSUMER DEMAND THEORY [CHAP. 5
Glossary
Consistency A consumer who is observed to prefer basket A to basket B will never prefer B to A.
Consumer price index (CPI) Measures the change in the average prices of goods and services purchased by a “typical”
urban family of four. It is a Laspeyres price index published monthly by the Bureau of Labor Statistics.
Empirical demand curves
over time.
Expected income (Ī)
Expenditure index (E)
Refer to estimated market curves derived from observed market price-quantity observations
Is given by the probability (p) of one income plus (1 2 p) times an alternative income.
Measures the ratio of period 1 expenditures to base period expenditures.
Hicksian substitution effect The change in the quantity demanded of a commodity resulting from a change in its price,
while holding real income constant by keeping the consumer on the same indifference curve before and after the price
change.
Laspeyres price index (L)
period prices.
Measures the cost of purchasing base period quantities at period 1 prices relative to base
New approach to consumer theory Postulates that a consumer demands a good because of the characteristics or
properties of the good, and it is these characteristics and not the good itself that give rise to utility.
Paasche price index (P)
prices.
Price index numbers
period.
Measures the cost of purchasing period 1 quantities at period 1 prices relative to base period
Measures the price of goods consumed over a particular period of time in relation to a base
Slutsky substitution effect The change in the quantity demanded of a commodity resulting from a change in its price,
while keeping real income constant in the sense that the consumer could purchase the same basket of goods after the price
change as that purchased prior to the price change.
Theory of revealed preference The theory according to which a consumer’s preferences can be inferred (and
indifference curve derived) from a sufficient number of observed choices or purchases in the marketplace.
Transitivity If A if preferred to B and B to C, then A is preferred to C.
Zone of ignorance The areas above the original budget line and to the right and to the left of the original point of
consumer equilibrium within which we are uncertain of the exact location of the indifference curve.
Review Questions
1. Slutsky keeps real income constant when the price of a commodity falls by (a) keeping the consumer on the same
indifference curve, (b) pushing the consumer to a lower indifference curve, (c) allowing the consumer to purchase
the same basket of goods as before the price change, (d) allowing the consumer to purchase more of both commodities
than before the price change.
Ans. (c) See Fig. 5-1.
2. Which of the following statements is false with regard to the Slutsky substitution effect? (a) It is larger than the
Hicksian substitution effect, (b) it leads to a demand curve which is more elastic than the Hicksian demand
curve, (c) consumption is on a different indifference curve than before the price change, or (d) it is given by a
movement along the same indifference curve.
Ans. (d) See Fig. 5-1.