04 - Budgets and Indifference

Question 1

Consumer Opportunities

Answer 1

What consumers are capable of. What they can consume.

Question 2

Consumer Preferences.

Driven by 4 properties of comparative analysis.

Answer 2

What customers choose among the possibilities and opportunities.

Question 3

Completeness

Property 1

Answer 3

In any comparison between two options, one of the following 3 desire states will exist.

A>B preference A
B>A preference B
A~B indifference

Question 4

More Is Better

Property 2

Answer 4

Principally, the assurance that more of any good will be desired over less.

This does not indicate if one variable is desired more than another.

Question 5

Indifference Curve

Answer 5

Defines the combinations of goods X and Y that give the customer comparable levels of satisfaction.

Since the values of X and Y may not the same, the ratio of X to Y may change over the length of the curve.

Points on along an indifference grow in value as they move farther from the origin. The most desired goods are on curves farthest from origin.

Question 6

Marginal Rate of Substitution (MRS)

Answer 6

The absolute value of the slope of the indifference curve.

The rate between two goods at which a customer is willing to give up an amount of one good for some amount of the other good and still maintain the same level of satisfaction.

Question 7

Diminishing Marginal Rate of Substitution

Property 3

Answer 7

When the Marginal Rate of Substitution is a convex curve, the proportion of exchange between qtys of one good for another change through the range of the curve.

As the customer obtains more of good X, the amount of good Y the he is willing to give up to obtain more good X decreases.

Question 8

Transitivity

Property 4

Answer 8

If A>B and B>C
Then A>C

If A~B and B~C
Then A~C

The indifference curves among these options do not overlap. This also eliminates perpetual decision making.