3- preferences

Question 1

what are the main axioms of preferences?

Answer 1

completeness, reflexivity, transistivity and continuity (technical assumption)

Question 2

what is the axiom of completeness

Answer 2

we assume that any two bundles can be compared. if a consumer chooses between X and Y, he should be able to say whether X is >= Y or Y>=X or indifference. preference ordering must be complete over all bundles of goods. any bundle can be compared to any other bundle

Question 3

what is the axiom of reflexivity?

Answer 3

we assume that the bundle is at least as good as itself that is X>=X. consumers must be indifferent between two identical bundles

Question 4

what is the axiom of transitivity?

Answer 4

if X >= Y and Y>= Z then X>=Z. in other words if X is preffered to Y and Y is preferred to Z then X must be preffered to Z

Question 5

what is the axiom of continuity?

Answer 5

there should be no sudden jumps or gaps in the utility function

Question 6

what is an indifference curve>

Answer 6

an indifference curve represents the set of all bundles that are equally preferred

Question 7

is it possible for indifference curves to intersect?

Answer 7

no it is not possible for indifference curves to intersect

Question 8

what is the shape of the indifference curve when the goods are perfect substitutes?

Answer 8

there will be a constant slope when the indifference curves are perfect substitutes

Question 9

what are perfect complements?

Answer 9

perfect complements are goods that are always consumed together in fixed proportions

Question 10

what is the shape of a perfect complement indifference curve?

Answer 10

they are L shaped curves

Question 11

what is a bad commodity?

Answer 11

a bad commodity is a commmidity that the consumer doesn’t like

Question 12

what does the indifference curve look like when there is a good and a bad?

Answer 12

when there is a good and a bad then the indifference curve has a positive slope. the direction of increasing preferences is when the indifference curve shifts towards the axis of the good

Question 13

what is the satiation/bliss point?

Answer 13

the satiation/bliss point is the overall best bundle where utility is maximised. any more or less consumed will make the consumer worse off

Question 14

when is a preference well behaved?

Answer 14

a preference is well behaved when they satisfy two additional properties: monotonicity and convexity

Question 15

what does monotonicity mean?

Answer 15

monotonicity means that more is better.

Question 16

what does local non satiation meean?

Answer 16

it means that if we take any bindle X and consider an arbitary small neigbourhood of X then we can always find another bundle Y in this neighbourhood that is preffered to X

Question 17

what does monotonicity imply?

Answer 17

it implies local non-satiation that is often applied in consumer theory ot derive most of the results

Question 18

what does convexity mean?

Answer 18

average is preffered to the extreme. in other words people like variety. they will likely prefer chips and a burger to two chips or two burgers