3. Consumer Theory Flashcards
What is an affordable set?
feasible set, bundles on or below the budget constrain, bundles for which the required expenditure at given prices is less than or equal to the income available
Unafforable set
unfeasible set, bundles that lie outside the budget constraint
What is the equation of the budget line?
P_sS+P_fF=M
What happens when the price of only one good changes?
The slope of the budget constraint changes
If the price of both goods change by the same proportion?
Shift parallel to the original one
What happens when there are more than 3 goods?
The budget constraint becomes a hyperplane or multidimensional plane
Rational consumer choice
All choices that a conusmer has to make a decision
Composite good
The choice between a good X and amalgram of other goodsY
The amount of income left after buying X
The amoun t of the consumer speands on goods other than good X
What is the slope of the budget constraint with a composite good
-P_x
What is a nonlinear budget?
After a set point, the Y changes
What is prefernce ordering?
Ranking of all possible consumption bundles in order of preference
Differ greatly among customers
Four simple properties of prefernce
Completeness Prefernce
The consumer is able to rank all possible combinations of goods and services
More is better principle
OTher than things equal, more of a good is preferred to less
Transitivyt preference
For any three bundles A,B,C, if he prefers A to B and perfers B to C then he always perfer Ato C
A>B
B>C
then A>C
What is the convexity preference?
Mixture of goods are preferable to extremes
